Is the divergence the ugly truth? Case of the EU from 2000 to 2014.

One of the ideology behind the European Union is the wish for all people to be equally wealthy. Countries with lower wealth are expected to “catch up” with more wealthy countries, as for example, the Baltic States catching up the Scandinavian countries. Unfortunately in existing Europe it does not hold true.

The most common way to visualize the convergence is to plot the average annual GDP growth vs. initial GDP, saying that countries with lower initial GDP should have higher GDP growth rates to be able to reach those countries at the top. For even better comparison, we look to GDP per capita, which shows the wealth of an average person within a country. The values are in euros, but in PPS terms, meaning that it is not the real GDP, it is the nominal GDP for the EU and adjusted GDP for all the Member States (this was for economists, sorry for that).

 

What we see then is the following:

There was some but not very strong convergence among EU MS from 2000 to 2007.

As we see Baltic States and Eastern Europe are on left top, meaning they had low initial GDP per capital level (the wealth was not that high), but the average annual GDP per capita growth rate (in %) has been the highest. While Scandinavian countries and Central Europe started with high initial GDP per capita level  – around 2,5 to 5 times higher than in Baltic States and Eastern Europe, but their annual growth was the lowest in EU. So the poorest part of the EU was actually trying to catch up with the richest part, or actually trying to get closer to EU average.

convergence2000-2007

 

Since economic crisis the convergence pattern is broken and EU MS have started to diverge.

Since 2008, when in the second half of the year economic crisis hit already the first countries in the Europe, the divergence is a clear case with a lot of outliers, meaning countries under programs with help from IMF or EU funds – there are Cyprus and Greece particularly. At the same time “the cloud” is much more spread and no linearity is observed. Several countries are even experiencing negative average annual growth during the last 7 years. Though, we still find Baltic States and Eastern Europe on the left, and Central Europe together with Scandinavian countries on the right side. But at the same time the average annual growth for Latvia and Germany has been the same, just above 2%. This means, that over last 7 years people in Latvia are not getting closer to the level of wealth that is experienced by Germans.

divergence 2008-2014

 

What this says about the future?

If the convergence is not reestablished, we are expecting poor countries always stay poorer than thouse rich countries. And even worse… If the average annual growth in Cental European countries are going to be as high as in Baltic States and Eastern Europe, we are going to have increasing difference between the wealth of the people in the EU. Rich people are going to get richer, while poor – poorer (not absolutely, but relatively to rich people). And this is in no-ones interest, neither the richest people, because when you don’t have other rich people around you, your business turnover stays low, the prices of products stay low, the business growth stays low, and so forth.

Therefore, people in countries like Latvia should risk and start their own value creation to get richer, and to help others get richer, so themselves can get eaven more richer and the cycle begins.

 

 

 

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