This document summarizes research on factors that contribute to economic growth slowdowns. It presents six approaches to identifying growth slowdowns in countries from 1960 to 2013. New EU members that experienced significant slowdowns often had unfavorable demographics, weak business environments, and low competitiveness. High-income countries were also susceptible to long-term slowdowns related to these factors. The research recommends Slovakia focus on improving tertiary education, business regulation, investment, and competitiveness to prevent future slowdowns and maintain economic convergence with advanced economies.

1. 1
Factors of growth slowdowns &
convergence
Presenter: Michal Pleva
University of Economics in Bratislava
Supervisor: Tibor Lalinsky, Senior Researcher
National Bank of Slovakia
Research Department
National Bank of Slovakia
August 28, 2015

2. Contents
 Part One
Research question
(Motivation, Data & Model specification Results)
 Part Two
Macro-level Impact
(Risk matrix, Key findings, Recommendations)
2

3. Motivation & Research Question
3
20
30
40
50
60
70
80
90
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Eurostat, own computations
GDP per capita PPP new members (Germany=100)
BG
HR
CY
CZ
EE
HU
LV
LT
MT
PL
RO

4. Growth slowdowns identification
4
Baseline definitions
 Aiyar et al. (2013) - GDP growth is regressed on the lagged income
level and standard measures of physical and human capital1
𝑟𝑒𝑠𝑡
𝑖
− 𝑟𝑒𝑠𝑡−1
𝑖
< 𝑝 0.2 ; 𝑟𝑒𝑠𝑡+1
𝑖
− 𝑟𝑒𝑠𝑡−1
𝑖
< 𝑝 0.2
 Eichengreen et al. (2012)
𝑔𝑡,𝑡−𝑛 ≥ 0.035; 𝑔𝑡,𝑡−𝑛 − 𝑔𝑡,𝑡+𝑛 ≥ 0.02; 𝑦𝑡 > 10,000
1 The rate of investment in physical capital is taken from the Penn World Tables. The rate of investment in human capital
across countries is unavailable, so we follow the standard practice of using the stock of human capital instead
Additional definitions
 Significant slowdown in growth: > 2*stdev(growth)
 Significant slowdown in residuals: > 2*stdev(residuals)
 long-term slowdown in growth: gt+1<abs(gt) for negative growth
 long-term slowdown in residuals: gt+1<abs(gt) for negative residuals
2 Residuals defined as difference between fitted and actual growth, based on (Xi,t+n -Xi,t)/n=α+βlog(Xi,t-1)+ηi+μi,t

5. Problem description
5
Data
20 explanatory variables covering demography, economic development,
institutional reforms and comeptitiveness
Sources: WDI World bank, Heritage foundation, PWT Tables, GDI, United Nations,
IMF, The Fraser Institute, The Atlas of Economic Complexity
Model Specification
Probit Model
Yt=α + β1xt + β2 (xt-xt-1)+ ε
Yt=α + β1xt + β2 xt
2 + ε
Yt=α + β1xt + β2 xt
2 + β3GDPt + β4 GDPt
2 + ε

6. GNI per capita EU (USD,2013)
6
0
10000
20000
30000
40000
50000
60000
70000
80000
BG RO HU PL HR LT LV SK EE CZ MT PT GR SI CY ES IT UK IE FR BE DE FI AT NL DK SE LU
Source: Wolrd Bank Atlas
Middle-income countries High-income countries
AVG New members AVG Initial members

7. Identified growth slowdowns
7
The number of identified growth slowdowns
Aiyar and team
(2013)
Approach 1
according to
Aiyar and team
(2013)
Approach 2
according to
Eichengreen
and team
(2012)
Approach 3
according to
long-term
growth
slowdown GDP
per capita
Approach 4
according to
standard
deviation GDP
growth
Approach 5
according to
long-term
slowdown in
residuals
Approach 6
according to
standard
deviation in
residuals
5-year interval
World 123 0 74 193 66 51 41
Europe & Central Asia 4 0 44 37 9 6 37
High Income Countries - 0 53 49 15 6 49
4-year interval
World - 0 86 269 88 59 269
Europe & Central Asia - 0 52 44 12 8 44
High Income Countries - 0 85 69 13 7 69
3-year interval
World - 38 106 366 123 85 366
Europe & Central Asia - 8 61 66 32 11 66
High Income Countries - 16 71 100 35 18 100
Interval 1955-2013 1990-2013 1960-2013 1960-2013 1960-2013 1960-2013 1960-2013
Total number of
countries
138 133 133 133 133 133 133
Source: Aiyar a kol. (2013), Eichergreen a kol. (2012),own calcucations.

8. Frequency distribution of identified
growth slowdowns
8
0
0.05
0.1
0.15
0.2
0.25
0.3
10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50
%
GDP per capita (thousands)
Source: Own computations, growth slowdowns identified by Eichengreen’s approach

9. 9
Statistically significant factors of GDP growth slowdowns (following Eichengreen et al. ,2012)
HDP per capita
HDP per capita
squared
Level of
indicator
Squared
indicator
Constant
No. of
observations
Demography
Higher
education
16.03*** -0.792*** -3.627*** 3.111** -81.08*** 955
Fertility rate 21.07*** -1.051*** 54.03** -4.727 -107.2*** 1,251
Mortality rate 19.04*** -0.937*** 2,698*** -80,760*** -118.9*** 1,251
Economics
Consumer price
index
19.46*** -0.976*** 4.874*** -4.803*** -97.90*** 1,048
Institutions
Freedom to
trade
16.88*** -0.841*** -4.516* 2.655 -83.59*** 889
Competitiveness
TFP 20.92*** -1.052*** -4.713*** 2.040*** -102.1*** 920
Index of
economic
complexity
16.08*** -0.802*** -0.306*** 0.0859 -81.36*** 695
*** p<0.01, ** p<0.05, * p<0.1
Source: Own computations, significant indicators.
Probit results (Eichengreen)

10. Robustness tests
10
Statistically significant factors of GDP growth slowdowns
Growth slowdowns Countries
Indicator Long-term Significant World Europe High-Income
Demography
Age dependency ratio √ √ √
Higher education √ √ √ √ √
Fertility rate √ √ √ √ √
Mortality rate √ √ √
Economic development
and the structure of the
economy
Share of services √ √ √
Investment rate √ √ √ √
Capital openness √ √ √ √
Total reserves √ √ √ √
Public debt √ √ √ √
Consumer price index √ √ √
Institutions & Economic
freedom
Regulation √ √ √ √ √
Freedom to trade √ √ √ √ √
Financial freedom
Investment freedom
Size of government √ √ √
Competitiveness
Terms of trade √
Technological level (TFP) √ √ √ √ √
Foreign direct investment √ √ √ √
Openness √
Index of economic complexity √ √ √ √
Source: own computations.

11. Growth slowdown risks for new EU
members
11
Country Fertility rate
Tertiary labor
force ratio
Investment to
GDP ratio
Freedom to
trade
internationall
y
Business
regulation
TFP
Foreign direct
investment
Terms of
trade
Index of
economic
complexity
BG 1,50 26,6 20,5 7,58 7,92 56,4 3,46 107,0 0,71
HR 1,51 21,6 23,9 7,67 6,98 70,4 1,02 97,7 1,05
CY 1,46 41,5 24,6 7,66 6,80 72,2 15,65 92,2 0,89
CZ 1,45 20,0 25,0 7,94 7,73 59,2 3,52 101,6 1,68
EE 1,56 37,2 26,1 8,25 7,82 61,8 3,55 94,1 0,93
HU 1,34 24,5 19,4 7,65 7,50 55,8 -3,08 95,2 1,42
LV 1,44 31,1 26,5 8,08 7,56 59,6 3,20 104,2 0,83
LT 1,60 37,1 19,1 7,61 7,81 67,2 1,53 93,4 0,87
MT 1,43 20,9 13,5 8,12 7,60 69,0 6,07 124,8 -0,64
PL 1,30 28,2 19,6 7,36 7,47 80,3 0,00 97,9 1,15
RO 1,53 17,6 26,3 7,75 7,71 52,2 2,17 109,7 0,91
SK 1,34 19,8 22,1 7,88 7,26 72,7 2,20 91,6 1,61
SL 1,58 29,1 24,9 7,38 6,48 59,5 0,18 94,6 1,56

12. Key findings
 slowdowns are more frequent in countries with unfavorable
demographic development, poor quality of the business
environment and weak external competitiveness
 significant and long-term slowdown also occur in high-income
countries
 probability of long-term slowdown in these countries depend on
similar factors as for middle-income countries
 unfavorable terms of trade in Slovakia seem to be compensated by
favorable non-price competitiveness (high TFP + economic
complexity)
12

13. Recommendations
Slovakia should focus on weaknesses manageable by relevant policies:
 focus on supporting higher education
 raise the quality of the business environment and promotion of
investments
Neglecting the identified deficiencies may lead to further lags in
Slovakia’s catching up with the advanced countries and can cause
reduction in relative living standards!
13

14. Literature
Abiad a kol. (2012): Chapter 4: Resilience in emerging market and
developing economies: Will it last?, World Economic Outlook, October
2012, IMF.
Harding a Pagan (2002): Dissecting the Cycle: A Methodological
Investigation, Journal of Monetary Economics, Elsevier, Vol. 49, No. 2,
pp 365–81.
Hausmann a kol. (2006): Growth Collapses, Working Paper No. 136,
Center for International Development.
Aiyar a kol. (2013): Growth Slowdowns and the Middle-Income Trap,
IMF Working Paper 13/71, IMF.
Eichengreena a kol. (2012): When fast growing economies slow down:
international evidence and implications for China, Asian Economic
Papers 11.
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15. Thank you for your attention !
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