Sectoral Decomposition of the Balassa-Samuelson Effect in CEE Countries: A CGE Analysis

We examine the impact of the Balassa-Samuelson effect on prices at the industry level, based on the results of computable general equilibrium (CGE) model simulations for four Central and Eastern European (CEE) countries. We decompose the results to explain the differentiation of impact on unit production cost by industry. We find that direct cost savings from productivity improvement typically exceed the effects of higher wages, even when considering the reciprocal effects of increased prices of nontradables. These effects are negative for the price competitiveness of the tradable industries and can be reduced by procompetition regulation in the nontradable sector.