Why are some countries rich while others are poor? Diverging development in the global economy has long been a prime interest of economists and historians alike, and both attribute an instrumental role to political and economic institutions. Perhaps nowhere has this been demonstrated more convincingly than in post-1945 Europe, where two fundamentally different growth strategies had developed, one of which has since clearly failed. The falling behind of Eastern Europe in per capita GDP and productivity during the period of state socialism has been subject to a myriad of studies. However, it has not been shown how large the relative underperformance of the region in economic growth actually was.

A simple eyeballing of comparative national-income estimates for the western and eastern parts of Europe is insufficient because it ignores differences in initial conditions and largely system-independent supply side factors. Similarly, the handful of growth-accounting exercises comparing East and West European economies at similar levels of development (Balassa and Bertrand 1970, Van Ark 1997) only differentiate between the proximate sources of growth across space and over time. The question by how much socialist economies fell behind can be answered only with a quantitative model that allows us to capture the gap between the exogenously determined growth potential of a country and its actual growth record.

This paper applies panel econometrics with country-fixed effects to isolate the differential in growth rates of per capita GDP between socialist and non-socialist economies from supply side factors that influenced relative growth performance in the post-war period. Vonyó (2008) developed a model that explains economic growth across OECD countries between 1950 and 1990 by initial levels of GDP per capita, labour-force growth, and the temporary output gap reflecting wartime destruction and post-war dislocation. All three factors were significant drivers of growth, with the effect of the post-war output gap gradually weakening over time.

The present paper applies this framework, with some modification, for 15 West and 9 East European countries. Controlling for convergence, labour-supply flexibility, and the post-war output gap with a linearly declining time-trend, being a command economy still had a large significant negative effect on annual growth rates. Socialist countries performed below their growth potential by around 1.7 percentage points between the 1950s and the 1970s. This gap increased to more than 3 percentage points in the 1980s. The only developing country in Europe, Albania, which retained an autarkic Stalinist system throughout the period, compared very poorly even with other command economies.

Although the primary aim of the paper is to measure, not to explain the underperformance of Eastern Europe, the econometric findings suggest that the countries in the region could not exploit their potential for reconstruction growth in the early post-war decades. This, at least partly, resulted from labour-supply constraints due to large population losses in the 1940s.

VIEW PAPER