Sources of growth: Evidence from ten central and Eastern European countries during 1993-2008

Abstract

This paper carries out a growth accounting exercise for the 10 Central and Eastern European (CEE) countries that are part of the European Union over the period 1993-2008. We estimate the capital share (α) from a Cobb-Douglas production function in an intensive form, by employing panel data techniques. The Hausman and Chi-Square tests indicate that a Cross- Section Random Effects with Period Fixed Effects model best suits our data. Based on this model, we find a capital share between 0.45 and 0.83, higher than the usual 0.3-0.4 used in growth accounting literature. When we take into consideration the quality of labour force the estimated capital share slightly decreases, but still remains high, in a range between 0.39 and 0.79. Our growth accounting results reveal that, on average, capital per worker accumulation is the main engine of growth in CEE, followed by the contribution of total factor productivity (TFP). However, when dividing by sub-periods, we found that the contribution of TFP cannot be neglected since during 1997-2004 it proved to be the main engine of growth in some CEE countries (Czech Republic, Slovakia, Hungary, Lithuania and Romania). Some policy implications are offered based on our results.

Keywords

• growth accounting
• TFP
• estimating capital share
• panel data
• CEE