Despite fair growth prospects and subdued vulnerabilities, medium-term growth potential in the region seems insufficient to ensure pre-crisis pace of real convergence. The most recent data shows that the convergence is still there, but it has markedly slowed down. At the current pace, many countries in the region would need decades to reach German, Austrian or Swedish levels of income, countries that we like to use as benchmarks. The last crisis also showed that there can be events that will hold back growth and convergence for a protracted period of time and even work in an opposite direction, leading to divergence. We know that when it comes to living standards, in the long-run it is all about labour productivity, which can be decomposed into growth of capital per worker and growth of total factor productivity (TFP). While we can expect an investments to continue growing, it is not likely that the rates that we have witnessed in 2000s, with strong inflow of FDIs and related transfers of technology and know-how, will be seen again in the near future. That is why the TFP will ultimately prove to be the major determinant of longterm convergence. For us as policy makers, understanding the determinants of technology adoption, the TFP growth, is the key, as this gives us the channel to act through. There is an increasing number of theories and empirical papers linking development and the adoption of technologies to the role of institutions defined in a very broad way.
And data support such outcome, here on a sample of emerging market countries. There is a strong positive relationship between quality of institutions and human capital on one side and growth on the other. Furthermore, in the context of new EU member states, countries with better institutions tend to withdraw more EU funds, which is another channel through which the government can help to increase the growth potential of a country. When it comes to quality of institutions, developments are not encouraging. If quality is proxied by World Bank’s Worldwide Governance Indicator, there has hardly been any convergence towards Germany, which can arguably be used as a benchmark. Notable exceptions are the Baltic countries where we have seen positive developments also in the aftermath of global financial 1/2  BIS central bankers' speeches  crisis. CEE countries also lag behind when it comes to the quality of human capital compared to those EU countries that achieve the best results in PISA test in Math and Science (Finland, Sweden, Austria, and Germany). Developments over time are also not encouraging as in many countries the PISA results have actually worsened during the last decade, which is a phenomena not confined only to the CEE region, but to the wider Europe. Such developments are on the one side worrisome, but on the other give us the opportunity to streamline and speed up reforms because potential gains can be substantial.