The division of Europe in market and centrally planned economies after World War II was associated with an increasing divergence of per capita incomes. While per capita incomes of the present EU members and the other market economies in Europe have converged during the post-war period, the income gap between the market and the planned economies has increased continuously after World War II. Neither the forced accumulation of physical and human capital nor moderate market reforms such as the "New Economic Mechanism" in Hungary or the "Perestroika" under Gorbachev in the former Soviet Union did reverse this trend. The realisation of the fact that a convergence of per capita incomes to Western standards was not possible within the framework of state property and centrally planning, was one, if not the driving force behind the collapse of central planning. At the outset of transition, the population in the Central and Eastern European (CEE) countries as well as most economic experts expected that the convergence of economic systems will yield a convergence of per capita incomes. Ten years after the begin of market reforms, the record of transition and economic reforms in Central and Eastern Europe is mixed: While all transition countries experienced a deep decline in output initially, there is only a small group of countries which realised growth rates well above those of the present EU members after the end of the transitional recession. In an other group of countries the income gap to the EU has remained constant, and in a third group the transitional recession has not yet come to an end.
This mixed record raises the concern that we will face a second economic divide in Europe between a "convergence club", which includes the present and future EU members, and sample of diverging countries, consisting of the CIS members and some other countries such as Bulgaria and Romania. However, present trends need not hold true for the future and depend heavily on economic policies. Nevertheless, the optimistic hypothesis that per capita incomes of the East will converge to Western levels in the wake of economic reforms has to be proved carefully.
In this Chapter the prospects for the convergence of per capita incomes between the East and the West in Europe are discussed on the background of our theoretical and empirical knowledge about growth and convergence. The argument is organised along the following lines: First, the theoretical arguments for the convergence and divergence of per capita incomes are briefly reviewed. Second, the empirical evidence for convergence among the market economies and divergence between the market and the planned economies in post-war Europe is proved. Third, the different developments among the transition economies after the begin of economic reforms are described and the explanations for the divergence in the post-transition period are discussed. The final Chapter summarises the main arguments and draws conclusions for the convergence process.
