Are the Lynxes Catching Up?

Naming economies after some of nature's finest predators often denotes that the economies in question are growing briskly. More specifically, these economies are going through the so-called catch up (convergence) process built-in to economic growth models as a function of positive externalities and increasing returns to scale in the beginning of the growth transition towards the assumption of a steady state or sustained endogenously driven growth per capita (constant returns to scale). We all know of the conception of the Asian Tigers and perhaps you also know the branding of the Eastern and Central European countries (EU-8) as the Lynx economies which I, on occasion, have reported on here at AS. As such, I am taking up the baton on this topic over at Demography.Matters in a note on economic growth in the Central and Eastern European transition countries. My main argument revolves around applying standard new growth theory (in this case endogenously driven growth) without accounting for the discrepancy within these countries' growth path between their apparent status as emerging and fast growing economies with the fact that have already gone through the later stages of the demographic transition with very low fertility rates to follow. In addition, they are experiencing a rapid outward migration in the higher valued added sectors which is presenting obvious problems for them in terms of pushing up the value chain. I am not taking issue with the traditional analysis emphasizing further investment in human capital to address the structural labour market mismatch as well as the suggestion to channel further investment into R&D. Rather, I am pointing to how the fact that these countries are out sync in terms of how far they have ventured in the demographic transition compared to their economic situation could perhaps mean that we should not expect standard textbook growth theory to apply.

Here is the summary of my note ... 

So, there you have it; another dose of demographic fundamentalism. Well, after all this is the 'demography.matters' blog so it should not come as much of a surprise. Having said that I am not fundamentally at odds with the traditional economic analysis fielded in the ECB article noted above. Without a doubt there is much pertinence in their general analysis. However, I do think that it fails to adequately factor-in the demographic component of long term growth and in this case the ability of these economies to sustain the convergence process by continuously moving up the value chain. However it should be noted that all the signs still point to a continuation in the convergence process, at least for now. Consequently, if you look at growth rates in, for example, the Baltic countries these are still very healthy. The question really, of course, is just how long this can be sustained and whether in fact these economies can decidedly shift their economic activities in the effort towards a long run steady state (or process of continuous endogenously driven growth)?