CEEC Growth Projections: Certainly Necessary and Necessarily Uncertain

In this paper we discuss the necessity for an indirect approach to assess the growth and convergence prospects of ten Central and Eastern European countries (CEEC10). The necessity for an indirect approach arises for two reasons. First, the ongoing structural changes in the transition economies imply that their growth process is not yet adequately described by the long-run growth forces as identified by (neoclassical) growth theory. Second, their upcoming European Union membership has to be taken into account in growth projections. The indirect approach proposed in this paper is to base the growth projections for the CEEC10 on growth equations estimated for the incumbent EU member states. Thus, in effect we propose a calibration approach. Our study differs from previous studies that employ an indirect approach in two ways. First, we estimate growth equations for the EU and not for a large world-wide country data set that contains many heterogeneous countries that are essentially unrelated to the CEECs. Second, we assess the uncertainty inherent in growth projections by estimating a variety of economically meaningful equations and by specifying a variety of plausible scenarios for the explanatory variables. This results in distributions of projected growth rates, which allow for an uncertainty analysis. Besides growth rate distributions also convergence times distributions are computed.