Economic Convergence in the Czech Republic and Slovakia

This brief discusses economic convergence in the Czech Republic and Slovakia vis-à-vis the EU-28 during the past two decades, focusing mainly on developments in Gross National Income (GNI) per capita. It addresses three questions. First, did economic convergence take place in both countries? Second, did convergence speed and patterns differ between the two? Third, have growth and convergence paths changed since the global economic and financial crisis of 2009? This brief concludes with a 'yes' to each of the above questions. The Czech Republic and Slovakia witnessed considerable catch-up growth relative to the EU average, particularly in the period between 2003 and 2008. In this pre-crisis period the rate of convergence was much stronger in Slovakia than in the Czech Republic, thereby substantially reducing the relative income gap that existed between Slovakia and its supposedly richer twin. Differences in the average speed of convergence between the two countries since the late 1990s can be largely explained by a simple model of "absolute beta convergence", which suggests that countries with initially lower levels of economic development should grow faster than higher-income countries. In order to further explain the specific economic developments in the two countries, this brief examines various policy-related and structural factors, including their industrial legacies and the attractiveness for FDI, labour market reforms, and EU accession combined with the receipt of EU structural funds. It further argues that Slovakia's euro adoption in 2009 is likely to have boosted its economic advancement, even though it is probably too early for an exact quantification of this supportive effect. Finally, the global crisis appears to have marked the start of a slowing - and temporary stalling - of convergence in the Czech Republic and Slovakia.