9 discussion on conditional and absolute convergence, we recognize that significant differences exist between CEE and EU countries and that, therefore, a model based solely on the concept of absolute convergence would inadequately address the bridging of income gaps between CEE countries and the European Community. Hence, the model presented in this section will allow for differences in environments among countries, thus implying an analysis based on the concept of conditional convergence.

# **Box 2: Data** Used in the Econometric Estimation.

To estimate our growth equation we use cross-section data from the version Mark 5.6 of the Penn World Tables compiled by Summers and Heston (1991). This data is based on the United Nations International Comparison Project which aims at providing comparable national accounts information by using detailed price comparisons for over one-hundred products. The prices are then used to convert local currency country data into a common currency unit, therefore enabling real quantity comparisons across countries. This data is available from the NBER web site.

From this database we use the GDP per capita for the years 1960, 1965, and 1989, defined as persons in the labor force (i.e., the economically active population), and the share of GDP assigned to investment in physical capital, calculated as the annual average share for the period between 1960 and 1989. The rate of growth of the labor force is the average corresponding to the period between 1960 and 1989 and is calculated from the annual data on population and GDP per capita for that period, the latter both in terms of persons in the labor force as well as in terms of total population. We assume that the rate of technological progress and the depreciation rate are the same for each country, the sum of which is set equal to five percent a year. Setting the sum of technological progress and depreciation rate at 5 percent is in line with other studies, such as Mankiw, Romer, and Weil (1992) and King and Rebelo (1990). The data on human capital is based on the educational attainment level calculated by Barro and Lee (1993). Of the data they have compiled we use the mean for three years --1975, 1980, and 1985-- of the average number of years of education of the total population.

We assume that output in any country i is produced according to the following production

# function

Yi = Ki' Hip (A N)'a .

[1] In this equation Y is output (GDP), K represents physical capital, H is human capital, A denotes 6 the country's level of technology, and N is the number of persons in the labor force . Both ax and 6 The introduction of human capital into a production function with constant returns to scale is similar to viewing capital as a broadly defined input (i.e., one which includes both human as well as physical capital). This has also been referred by many authors as a Solow-augmented model (see, among others, Barro and Sala-i-Martin, 1995, and Mankiw, Romer, and Weil, 1992). While a model based on this production function would still imply that long-run economic growth is exogenously determined, our aim is to analyze (conditional) convergence. Endogenous growth models have little to say on this topic since their main goal is to provide an interpretation as to why countries continue to grow indefinitely without relying on the exogenously given technological progress explanation. In this sense, convergence is not the usual focus of these models.