“Infant” economies in South-Eastern Europe

Abstract

Transition economies have responded quite differently to similar procedures and foreign economic and sociopolitical interventions. This is partly because of the exogenous (from the economic perspective) features of each country. In the present paper we focus on the economic explanation. Following an introductory discussion of the stylized facts of the deepening segregation within the Central and Eastern European transition economies, we proceed with a general equilibrium model of imperfect competition (a la Dixit-Stiglitz). We introduce (1) more than one imperfectly competitive manufacturing sectors and (2) capital as the ?pseudo? production factor that provokes economies of scale. Based on the abstract theoretical model, we argue that the supposed automatic, selfbalancing process for closing cross-country disparities may not appear, even if the noneconomic factors are neutralized. This is because there is a possibility of experiencing a virtuous cycle of endogenously reinforced attraction of foreign accumulated capital. Economies that do not have the necessary features for this to happen because they start from a comparatively inferior level of development and/or due to a lack of preexisting strong manufacturing - ?infant economies? according to our proposed terminology - will experience an endogenously justified, flatter path of development and may not find it easy to catch up with others.