The Distribution Dynamics of Income in Central and Eastern Europe relative to the EU: A Nonparametric Analysis

Abstract

After more than two decades of transition and integration, countries in Central and Eastern Europe (CEE) still exhibit income levels that are significantly lower than the European Union (EU) average. This paper examines convergence in per-capita GDP between CEE and the EU over the period 1990-2012 by employing a combination of parametric and nonparametric methods, which provide more detailed insights than previous studies. The results indicate that the first decade of transition has been marked by divergence from the EU benchmark. In contrast, CEE countries experienced strong convergence over the 2000s, even in the face of the global financial crisis. However, the distribution of relative income evolved from a unimodal to a multimodal one, revealing growing disparities within CEE. Human capital accumulation and progress in economic reforms are identified as the key determinants of convergence, while financial deepening and price instability had a negative effect, especially in the past decade.