"If we want to have the same opportunities in Estonia as in Denmark, convergence is a good thing," says Karsten Staehr, a professor at Tallinn University of Technology (TalTech) and a research advisor at Eesti Pank with Danish roots. In his research, convergence means that countries become more similar in terms of living standards — in other words, poorer countries catch up with wealthier ones in terms of purchasing power.

In collaboration with Meiyu Lu from the University of Ostrava, Staehr studied the process of income convergence and the speed of economic growth in 30 post-communist countries. To do this, he analyzed and compared these countries' GDP per capita figures from 1995 to 2023. The analysis showed that incomes have become more similar in 11 Central and Eastern European countries. "At the same time, convergence means that if you are already quite wealthy, you don't progress very quickly. We've seen this in Estonia as well, where the economy is not growing rapidly but has, in fact, been in decline in recent years," Staehr points out.

Gap with Western Europe closing slowly

In economic terminology, convergence can refer to different phenomena. "For example, there is price level convergence. When we joined the euro area, it was said that prices within the eurozone would become more similar, or converge," explains Karsten Staehr. However, he and Lu were more interested in what economists call real GDP convergence, which reflects the actual value of people's incomes. "We were interested in what you can buy with your income," he clarifies.

The analysis revealed that, overall, the economies of the 30 former communist countries have grown 2.3 percentage points faster per year than those of the so-called old European Union member states. These older EU countries are represented by the EU-15 group, which consists of the 15 countries that were part of the European Union as of January 1, 1995. This group includes Finland, Sweden and Denmark, as well as the United Kingdom, which has since left the EU.

"The results show that at the current pace, it would take 40 years for the income gap between the former Eastern Bloc and EU-15 countries to shrink by half," Staehr points out. According to him, this is very slow progress. He argues that catching up with the EU-15 should not be too difficult, as these countries have also faced economic and health crises in recent years.

"On the other hand, if we look at how quickly countries are catching up with Western Europe or the United States, we see the same average everywhere: 2 percent growth per year and 40 years to halve the gap," says the professor.

At the same time, Staehr and Meiyu Lu observed that 11 Central and Eastern European countries have become more similar in terms of living standards. In addition to Estonia, this group includes Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. "For example, data on Romania shows that it is now as wealthy as Latvia. I visited Romania last summer, and you can see it on the ground — they really have caught up," Staehr acknowledges.

This trend highlights both the brighter and darker sides of convergence. On the bright side, countries like Bulgaria, Romania and Croatia have become wealthier. "On the downside, if you are one of the richer countries in this group — such as Slovenia, the Czech Republic or Estonia — you don't grow very fast," the professor compares.

These countries have fallen into what is known as the middle-income trap. "Countries that reach a certain level — around 75 percent of the EU-15 average or 50 percent of the U.S. income level — seem to slow down," Staehr explains. In his view, once countries achieve a relatively high standard of living, they tend to become somewhat complacent. At that point, they may no longer pursue reforms or make difficult economic decisions. "Estonia seems to have slowed down, and perhaps we have also reached a certain level of complacency," the professor suggests.

Shedding illusions

From the European Union's perspective, convergence is evidence that the bloc's policies are broadly working. "At its core, the goal is to reduce differences in living standards across different regions of the EU. A great deal of policy is aimed at achieving this, including cohesion policy," explains Karsten Staehr. In his view, Estonia has benefited significantly from the EU's Cohesion Fund, while Bulgaria and Romania have gained even more.

While Central and Eastern European countries are converging as a group and narrowing the gap with EU-15 nations, Staehr argues that within individual countries, there is little sign of equalization. "We see that a few central or capital-adjacent regions grow rapidly, while other regions lag far behind," he points out. In Estonia, for instance, population and economic activity are increasingly concentrated around Tallinn, where wages are higher, while other counties are losing residents. According to Staehr, this pattern is visible across Europe.

Staehr believes that Estonia wants to restart its convergence with the wealthy Western European countries. To achieve this, he recommends greater investment in education, as well as infrastructure — particularly a well-developed highway network. "More investment should go into healthcare to ensure that people stay healthy and remain in the workforce," he adds. He also suggests considering public sector reforms. "Take the postal system, for example. In Denmark, there are no post offices anymore, so why should they still exist here?" he asks. In other words, the issue is not just about resources but also about how efficiently public services are delivered.

Staehr argues that Estonia today is also stuck in the middle-income comfort trap. "When I first came to Estonia in 2006, the country was much more technologically advanced and IT-oriented than Denmark and Norway. Now, when I visit my home countries, the situation has changed," he observes. Among other things, he points to Estonia's postal service and nationwide transport connections as areas that need improvement.

"The growth Estonia experienced up to 2007 was typical of how developing countries grow. They keep borrowing to move forward," Staehr explains. In the 2000s, growth was so rapid that then-Prime Minister Andrus Ansip (Reform) promised to bring Estonia into the ranks of the five richest countries in Europe within 15 years. However, after the 2008 financial crisis, international investors stopped lending money to Estonia.

Since then, Estonia has not seen such rapid economic growth again. "Perhaps we were too intoxicated by how easy it seemed to grow through heavy borrowing. We have been paying off those loans in recent years, but we assumed growth would be easier than it actually is," the professor concludes.

Karsten Staehr and Meiyu Lu have published their study in the journal Eurasian Economic Review.

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