The Determinants of Economic Growth in Hungary, Poland, Slovakia and the Czech Republic since the Transition

This dissertation aims to analyse the economic growth determinants in four Central Eastern European countries (CEE-4) - Hungary, Poland, Slovakia and the Czech Republic - since their transition from centrally planned to free market economies. The time span of research encompasses the years from 1995 (when these countries passed beyond their lowest output levels since the economic transformation) till 2018. The CEE-4 countries have been chosen based on their direct geographical proximity with Western Europe, in particular with its most advanced economy - Germany, and their adoption of different approaches to conducting market reforms. The thesis closely examines the linkages between geographical location, trade and financial flows in the region prior to and after the accession to the European Union (EU), and the outcome of complex reforms for economic growth in the CEE-4. Following the introduction in Chapter 1, in order to obtain a general overview of the sources of economic growth in the CEE-4 countries the Solow growth accounting and the non-parametric approach have been presented in Chapter 2. The findings obtained from the above decomposition methods provide support for a hypothesis that technological progress together with strong capital accumulation were the dominant factors behind the economic growth and convergence process in the CEE-4 countries in the post-transition years. Chapter 3 investigates financial interlinkages of the CEE-4 with Western Europe. It provides a valuable assessment of a distinctive “development model” pursued by the CEE-4 region since the transition, of which financial integration - in the form of large capital inflows and an increasing presence of foreign banks - has been an integral part. It has allowed the CEE-4 economies to enter a growth path driven by domestic demand financed substantially by foreign savings. The study provides an assessment of the impact of the global financial crisis and European debt crisis on capital flows into the CEE-4 region. The main contribution of this chapter has been an in-depth empirical study of factors affecting credit growth in Central Eastern and South-Eastern Europe (CESEE) in the years 2012-2016 based on the Bank Lending Survey (BLS) of the European Investment Bank. It allows to account for cross-border effects, namely home-host country macroeconomic conditions and parent-subsidiary banks’ characteristics and health, while controlling systematically for the answers from the BLS. The purpose of Chapter 4 has been an analysis of the business cycles synchronisation of the CEE-4 countries with economic cycles of Germany iii and the Euro area. The analysis of the interdependencies between the business cycles is important in monitoring the effectiveness of pursued economic policies in the CEE-4 region since the transition. Studying the degree of synchronization of the CEE-4 business cycles is also vital in connection with the future introduction of the Euro in Hungary, Poland and the Czech Republic. To this end, the time series analysis methods have been introduced in this study, which focus on an analysis in the domain of both time (cross-correlation analysis) and frequency (cross-spectral analysis). This allows obtaining a more comprehensive picture of the dependencies between the business cycles of the CEE-4 countries and the economic cycle of Germany and the Euro zone. The analysis shows that fluctuations in economic activity in the CEE-4 countries have become over time, to a relatively large extent, synchronized with the business cycles of Germany and the whole Euro area. Chapter 5 examines the impact of macroeconomic and institutional factors on economic growth in the CEE-4 countries since the transition. The building of a market economy in the region required deep macroeconomic reforms and the creation of a wide range of institutions and business practices needed to support those reforms. To examine significant changes which have occurred in the last two decades in the region, a wide range of macroeconomic and demographic variables as well as key institutional indicators have been analysed. For this purpose, a new approach has been employed based on the Bayesian Model Sampling (BMS), which implements Bayesian Model Averaging for linear regression models. This comprehensive study also provides an empirical analysis of growth determinants in the CEE-4 region in comparison to the Euro area-12 group as well as within the EU-28 block.