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Structural Change and Catching Up: Experience of the Ten Candidate Countries

Gács, János (2002): Structural Change and Catching Up: Experience of the Ten Candidate Countries. Published in: IIASA Interim Report No. IR-02-031/April (April 2002): pp. 1-32.

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The paper analyzes the experience of the Central and East European candidate countries with respect to major macro-level changes in the structure of their economy relevant for their catching up. More precisely, the production and utilization sides of the GDP, as well as the structure of manufacturing industry are focused on. The most important development on the production side of the GDP has been the substantial reduction of previously over-developed industrial activities on the one hand, and the emancipation of service activities, on the other. In the past 11 years the candidate countries caught up with countries at the same per capita level of GDP in terms of service intensity. Expanding market services have played a crucial role filling the void after central planning was abandoned, since efficient market coordination, the working of the “invisible hand” could not have developed without them. Relevant inputoutput coefficients show some evidence that the impact of services is deepening, this sector is contributing to and determining the production of value added at more stages of the production process than before. Restructuring within manufacturing shows a wide variation across the candidate countries. Good performance in the phase of recovery of output was not necessarily associated with large structural shifts. The dominance of labor intensive products in manufacturing, however, indicate that productivity catching up will necessitate further massive shifts across the sub-sectors in most of the candidate countries. Even if the large share of “screwdriver operations” in the framework of multinational networks may blur the picture of manufacturing structures, we can identify that the countries that attracted the largest part of FDI managed either to achieve great structural shifts in their industry, or to develop sub-sectors with potentially high unit values, or both. On the utilization side of the GDP substantial fluctuations took place. The expectations, however, that following stabilization and recovery high domestic savings rates and relatively high domestic investment ratios would support the evolving real convergence process, have been realized only in a few country. Moreover, in some of these economies sizable proportion of the domestic savings was wasted. This mixed development emphasizes the importance of utilizing foreign savings, particularly in the form of direct investment. The programmed progress of the EU accession process is crucial both for increasing the potential volume of foreign savings and to achieve that the efficiency gains that were dominating the period of recovery in 1995-1999 continue to accompany the accumulation of physical capital.

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