This Working Paper by Bruegel Senior Fellow Reinhilde Veugelers examines the potential for a knowledge-based growth path in transition countries of central and eastern Europe, the Caucasus and Central Asia. The paper looks closely at how total-factor productivity, a residual growth factor commonly interpreted as reflecting technological progress, drives growth rates in these economies which exhibit a much lower GDP per capita compared to the EU15 or the United States.  By analysing the prerequisites for knowledge-based growth, the author explains why transition countries are at a systemic disadvantage relative to the EU15, US and Japan and have limited potential for knowledge-based growth.