Convergence of Non-EU Countries in the CESEE Region

Almost all non-EU CESEE countries have converged with Western Europe over the past three decades. However, the pace of convergence has been mixed. For non-EU CESEE countries as a whole, convergence has generally developed at a slower pace than for EU member states in the region. Econometrically, we find that the poorest countries tended to convergence more quickly, and that the investment share in GDP (linked to overall infrastructure quality) and EU accession were important. Other factors also played a role, such as state fragmentation, war, and proximity to Germany. Institutional factors remain key to long-term convergence performance, and here EU-CEE countries are much stronger. Within non-EU CESEE, Albania, Kazakhstan, Serbia and North Macedonia have all registered institutional improvements relative to Germany since 1996. By contrast, Russia, Turkey, Belarus and Moldova have gone backwards. Compared with EU-CEE, we found that non-EU member states in the region have been characterised by smaller and less competitive manufacturing sectors, and less integration into regional value chains. In addition, they tend to have a lower share of FDI from Western Europe and into manufacturing and finance, and a notably worse development of the private sector in areas such as privatisation, restructuring and price liberalisation.