Structural Change and Economic Growth in Visegrad and South Caucasian Countries

Abstract

This paper investigates the effect of the change in the economic structure on economic growth in Visegrad and South Caucasia. The Shift Share Analysis (SSA) method measures the direct effects of structural change on productivity growth. Fully Modified OLS (FMOLS) regressions evaluate the indirect effect of the advanced sectors on economic growth. SSA finds that within sector productivity is the main driver of economic growth in both regions and the manufacturing sector is the engine of within sector productivity growth in Visegrad countries. Expansion of the modern business services sector produced a positive reallocation effect in all countries but the lack of growth dynamism in the productivity of this sector undermined the positive reallocation effect in Hungary and Slovakia. The FMOLS regressions show that manufacturing export has a positive effect on economic growth while business service production does not. The general structure of Visegrad economies is similar to advanced countries and they can achieve further development by upgrading their production within advanced sectors while South Caucasian countries can develop their economies by expanding the high-value sectors and channeling the excess labor in low-value sectors to relatively higher value activities. Both strategies require investment in human capital and upgrading their domestic capacity.