Macroeconomic Production Functions for Eastern Europe

This paper was presented in June 1974 at the Symposium ―On the Measurement of Factor Productivities‖ at the castle Reisensburg in Bavaria, and was published in the book of proceedings from this Symposium. It contains results of several years of research about the economies of six East European countries, namely Czechoslovakia, Poland, Hungary, East Germany, Bulgaria and Rumania. Data on output, capital and labor for 15 – 20 branches of industry and 17 – 20 years were collected for each of the mentioned countries. About 40 different models of production function were estimated using time series, cross-section, and combined time series and cross-section regression analysis. Because the time series regressions were run for each industrial branch in every country and cross-section regressions were run for each year across all branches in every country and almost always 40 different versions of production function were estimated, several thousand regressions were run all together. The results showed that in most cases the production functions had usual form with constant returns to scale and close to unit elasticity of substitution between capital and labor. However the most interesting result was relatively high original but steadily declining growth rate of total factor productivity (technical progress). This indicated that within 10 to 20 future years Eastern Europe would be tremendously lagging behind the West.