Henan Wang (4119051)
University of Minnesota-Twin City
Accompanied with important historical event of Berlin Wall Collapse, there were drastic changes in Eastern Europe and previous Soviet Union. The economic system of many countries began to transfer from centrally planned economies to market economies. Those countries were called "Transition Countries" and 1990-2002 was a critical transition period.
Among the transition countries, the Central and Eastern European countries (CEE) and the Commonwealth of Independent States (CIS) were very different in economic development. The five representative CEE countries were Czech Republic, Hungary, Poland, Slovakia and Slovenia and five representative CIS countries were Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. CEE countries had very good development in the transition period while CIS countries did not perform as well as CEE countries.
In this paper, the main factors that caused the development difference in CEE and CIS countries are analyzed. The time focused on is from 1990 to 2002, which was exactly the transition period of both CEE and CIS countries. The basic theory used in analyze is Solow model.
2. The General Description on Economic Growth
The data quoted from Penn World Table can give Fig.2.1 and Fig.2.2 below which indicate the economic growth rate for CEE and CIS countries.
Figure 2.1 --Data from Penn World Table
Figure 2.2—Data from Penn World Table
From Figure 2.1 and Figure 2.2, we can conclude that, in the earlier years of transition, both CEE and CIS countries generally experienced a decline of output and CEE countries were in an even more serious situation than CIS countries. From 1994, all CEE countries achieved positive economic growth while almost all CIS countries did not go back to the positive economic growth until 1997. In the beginning of 21st century, CIS countries experienced an economic decline again even though the economic growth was still positive , but CEE countries maintained a good trend in economic growth. According to the depth and durability of the economic recession, CIS countries were undoubtedly in a worse condition than CEE countries.
3. Further Analyze in Economic Development
This part will give further analyzing about economic development in CEE and CIS countries. In part 3.1, Solow Model will be introduced as a basic tool for analyzing economic growth. In part 3.2 and 3.3, both relationship between economic growth and investment rate and relationship between economic growth and FDI will be investigated. In part 3.4 and 3.5, both relationship between economic growth and labor force and relationship between economic growth and human capital will be researched. In part 3.6, the relationship between economic growth and R&D (research and development) will be considered .
3.1 Solow Model Instruction
The Solow model with human capital is the basic method for analyze in economic development. The Cobb-Douglas production function of Solow model with human capital is :
Y = Ka(AH)1-a (3--1)
Where Y is total output, A is technology with growth rate g, K is physical or human capital.
The steady state of output per capita is: y*= A(t)h(s/ n+g+d)a(1-a) (3—2)
Where h is education level per capita, n is population growth rate, g is technological progress rate and d is depreciation rate.
From the steady function, we can see that there are several ways to increase the total output based on the Solow model: increase of A, human capital, investment rate, total capital and labor force; or decrease of population growth rate, technological progress rate and depreciation rate.
In this paper, five factors will be focused for consideration : Investment (inner and external), labor force, human capital and technology. In order to get the results more easily and directly, a new model to express economic growth is introduced,