Therefore, concluding that real income developments before the onset of the crisis were in line with unconditional convergence theory would simply be spurious. Since the onset of the crisis positive income convergence trends were first reversed in many of the countries in the region and, when convergence reappeared, its pace was significantly slower 3  than at the beginning of the 2000s. At the current pace of convergence, most countries in the region would need decades to reach German, Austrian or Swedish levels of income, countries that are often referred to as the benchmark for the CEE region. Which, in a way, brings us to the notion of conditional convergence. The theory of conditional convergence implies that if there are persistent differences across countries in preferences and other institutional features, divergence is possible in terms of both levels of income and growth rates. And the last crisis has reminded us of this quite roughly. Just take a look at the countries of Europe's periphery. The average level of income of Greece, Italy, Spain and Portugal in 2016 was only at around 67% of the German income, compared to 80% at the beginning of the millennium. Similarly, in Croatia, Slovenia or, to a lesser extent, also the Czech Republic, the relative level of income in 2016 was lower than in 2008. Therefore, growth and convergence can be held back for a protracted period of time before they reappear, or forces can even work in an opposite direction, leading to divergence.
If quality of institutions is proxied by the World Bank's Worldwide Governance Indicator (which includes six broad dimensions of governance: Government Effectiveness, Regulatory Quality, Rule of Law, Control of Corruption, Voice and Accountability, and Political Stability and Absence of Violence/Terrorism), there has hardly been any convergence of the CEE region towards Germany. Notable exception are the Baltic countries where we have seen positive developments also in the aftermath of the global financial crisis. A very similar conclusion can be drawn when looking at the human capital quality, not only that the CESEE countries lag substantially behind the EU countries that achieve the best results in PISA tests in Math and Science (Finland, Sweden, Austria, and Germany), but the developments over time are also not encouraging as in many countries the results actually worsened during the last decade. So, one can raise the question of how did we manage to  6  converge at a relatively high pace before the crisis, or why convergence continues, with such institutions and human capital? On one side, such developments are worrisome, but, on the other, they give us the opportunity to streamline reforms. Gains from reforms can be substantial. The European Commission estimated that structural reforms that close only half the gap with best performers in different areas (market competition and regulation, R&D expenditure, skill structure, tax structure, labour market participation, unemployment benefit ‘generosity’ and active labour market policies), which is not overambitious, could have significant macroeconomic effects.