The middle-income trap in Central and Eastern Europe in the 2010s: institutions and divergent growth models

Abstract

AbstractThe paper evaluates the convergence paths of Central and Eastern European member states of the EU during the 2010s, when the main task for these countries was avoiding the middle-income trap—when wages are not so low anymore to compete with less developed countries, while innovation is not developed enough yet to compete with developed countries. Using various statistical indicators, the paper shows that while most countries in the region have been on a convergence path during the decade under analysis, not all succeeded in avoiding the trap. While some countries successfully implemented policies to step on the path of productivity- and innovation-led growth (Czechia, Slovenia, Estonia, and Lithuania), in several other states, growth was supported mainly by low costs and loose monetary conditions including significant transfers from the EU. The comparative analysis of Estonia and Hungary illustrates the different growth models and shows how the institutional system plays a key role in exiting the trap.