Indebtedness and the pace of catching up in the CEE countries

Abstract

The paper verifies the existence of the relationship between the economic growth – i.e., the main determinant of the catching up process – and the level of government, household and external debt (foreign liabilities). The comparative analysis of the correlation for CEE11 countries and EU14 countries confirms that the level of indebtedness is a strong determinant of economic growth, and thus of the catching up process. The authors confirmed the "unfair" relationship that high debts more severely constrain development in less credible developing countries, and that tolerance for public debt in developing countries has decreased in recent years. The results also show that in developing CEE countries – unlike in the case of developed countries – higher levels of foreign liabilities and their stronger growth turn out to be a hindrance to economic growth. Finally, it should be emphasized that the fact that the stronger increase in household liabilities was accompanied by higher average economic growth in the CEE countries in the analyzed period (as opposed to EU14 countries) should be treated as an important warning. Probably the relatively high (although noticeably lower than in the EU14 countries) and/or growing household debt in the CEE countries will also at some point begin to slow down their economic growth and the pace of the catching up process.