Journal Issue
Working Paper Summaries (WP/92/1 - WP/92/47)

“Assessing Eastern Europe’s Capital Needs”

International Monetary Fund
Published Date:
August 1992
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This paper assesses the capital Eastern Europe will require to catch up to the average standard of living of the EC countries. Per capita GDP figures for 1992 for Eastern European countries, based on purchasing power parity estimates, are used to derive the annual GDP growth rates necessary to achieve defined targets by 2002: for Czechoslovakia and Hungary, two thirds of the average per capita GDP projected for the EC; for Bulgaria, Poland, and Romania, one half. The required growth rate for the region as a whole is about 12 1/2 percent. The capital needs required to generate these growth rates are estimated with a CES (constant elasticity of substitution) production function model, parameterized on the EC.

This approach underscores the importance of improvements in efficiency in determining the capital needs associated with any growth path. Thus, assuming no efficiency gains from 1992 on, the postulated growth rate for Eastern Europe as a whole would require ratios of investment to GDP of over 100 percent—which is clearly unrealistic. Alternatively, if all inefficiencies (compared with the EC) could be eliminated by 2002, the cumulative investment needs for the region would be about $2.5 trillion, or 30 percent of projected national income over this period.

The policy implication is that rapid growth requires the rigorous implementation of reform policies, including market liberalization, the establishment of effective ownership, and institution building in such areas as legal, statistical, and accounting systems. Such reforms are essential for promoting both efficiency gains and investment.

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