7 growth rates of GDP determined by their own environments. If we net out from the growth rates of GDP of any group of countries what can be attributed to these differences in environment (i.e., among other, differences in human capital, government policies, consumer preferences, and other growth determinants), then it has been argued that the hypothesis of poor countries growing more rapidly than rich countries is once again true. This is known as _conditional convergence_ (see Box 1 S for a more thorough discussion) .

# **Box 1: Different Concepts of Convergence.**

The augmented neoclassical growth model assumes an aggregate production function in which physical capital, human capital and labor are the only three inputs and where technological progress is assumed to be exogenously determined. This model also assumes that the production function exhibits diminishing returns to each individual input. The latter implies that, assuming two of the three inputs are fixed, the first units of the non-fixed input enable to produce more units of output than the following units of that same input.

In this framework, if countries ARE EQUAL in all respects except for their initial level of capital per capita (both physical as well as human), then poor countries (i.e., those with less capital per capita) get more out of each extra unit of capital per capita than rich countries. Hence, poor countries grow more rapidly than rich countries and, eventually, the output per capita of each country is equal. Thus, it is said that **_absolute convergence_** takes place because these countries reach the same capital per capita (of both types) and output per capita level. This level is known as the steady state and, in the neoclassical growth model, implies no growth takes place in per capita terms when assuming no technological progress.

However, this concept of convergence seems to have little relation with the existing evidence for different groups of countries. This is mainly because countries ARE NOT EQUAL and differ in many aspects which are relevant for economic growth. For example, it may well be the case that two countries have different savings rates, different rates of population growth, different government policies, different consumer tastes, or different production technologies. These differences are precisely what determine the lack of a clear trend in **Figure 1** and imply that each country has a different steady state level. In this context, the concept of **_conditional convergence_** suggests that the country that finds itself proportionately farther away from its OWN steady state will grow faster than the country that is proportionately closer to its OWN steady state. This enables, for example, rich countries with very high savings rates to grow faster than poor countries with very low savings rates.

The evidence on convergence among current members of the European Community suggests that the countries in CEE (and their regions) might converge, in time, to the EU average income per capita level. This seems to be also supported by the experience of some late-comers into EU membership. For example, with the exception of the slowdown observed in recent years, Greece, Ireland, Portugal, and Spain have seen a significant decrease in their own gaps with the EU average (see Table 2). As the regional convergence studies of Barro and Sala-i-Martin (1995) have shown, convergence does occur whenever the environments are similar. The CEE countries should S In this paper we do not examine the implications of fixed factors and center the analysis on those which are variable. For an analysis that evaluates natural resources and geographical location see Sachs and Warner (1995).