Regardless of what significance one attributes to the financial crisis, it is clear that the downward trend in interest rates began much earlier. Back in the period prior to the financial crisis, the Federal Reserve Governor of the time, Alan Greenspan, described the low longterm US interest rates as a mystery. Growth, savings and technology determine the real interest rate Regardless of which explanation one concurs with, most people consider the long-run global real interest rate to be primarily governed by expectations of potential growth, the propensity to save and technological advances. I will therefore first describe how the various factors can influence the real interest rate. I will then discuss possible explanations as to how growth, propensity to save and technology may change. Lower potential global growth gives lower global real interest rate According to economic theory, expected growth should play an important role for the development of the real interest rate; the lower the growth, the lower the real interest rate. International organisations such as the IMF and the OECD have made downward adjustments to their assessments of the global growth trend in recent years. This could lead to a lower real interest rate. At the same time, one can note that global growth was both stable and relatively high during the 15–20 years prior to the financial crisis. It is thus not possible to explain the long-term fall in interest rates prior to the financial crisis as due to lower global growth.
There are no guaranties that levels of income in the CESEE countries are going to converge towards those of the developed Western economies. No guarantees that these countries are not going to form one, or more, of the so-called convergence clubs at a lower level of per capita income compared to their developed peers. However, it is our job to dare to introduce reforms even if we are not a 100 percent sure about the timing and the scale of the effects, as these are often not under our direct control. But if history teaches us anything, and if we follow the best practices from around the world, not only the EU, then the path we have to follow becomes much clearer. And the closest thing to a recipe for reducing the probability of being caught in the middle income trap (of low growth and slow or no convergence) would be to dare to reform. Be it the education system with an aim to increase the quality of human capital, be it liberalising product and labour markets controls, be it the reform of justice or public administrations systems, or anything else that is proven to enhance the business environment in the country. It is as simple or as difficult as that. But, and this is my final thought – we have to keep in mind the political economy dimension of the process, and there things do not look encouraging.