Trade, Structural Change and Growth in an Open Monetary Economy

As regards structural change in Eastern Europe, it is clear that one should expect considerable structural change in the initial transition stage and possibly also once high foreign direct investment inflows occur. This occurred early on in Hungary, and the Slovak Republic, but only with a considerable delay in Poland. The various subsequent indicators show different intensities of structural change, and the intensity of change is not equal across the various indices. On theoretical grounds (see appendix) one should focus mainly on the Lilien index and the modified Lilien index. As the feature of those two indicators consider the sectors’ relative weights, and also meet other standard requirements. As we can see in the subsequent table, the various indicators which summarize the intensity of structural change in the period from 1993 to 2001/02, the statistics point to rather strong structural change in several accession countries. Ideally, workers move out of sectors with low productivity growth towards sectors with high productivity growth, the latter often being found in sectors with high foreign direct investment inflows (FDI). FDI and investment of domestic firms will increase capital intensity and this, along with improved technology, will raise productivity. A positive gap between the growth rate of the wage rate and sectoral productivity growth will reinforce sectoral profit rates which in turn should stimulate sectoral FDI inflows. To the extent that economic catching-up and modernization is associated with high cumulated FDI inflows, one should expect that a considerable part of trade is shaped by FDI. Intra-company trade accounts for roughly 1/3 of trade in OECD countries.