Lecture 9' Measuring the effects of economic integration

1
Lecture 9. Measuring the effects of economic
integration

• Lecture objectives
• To describe the techniques used to estimate the
  trade effects of integration
• To discuss the methodology and results of the two
  major evaluations of the single market programme,
  the Cecchini and Monti reports
• To assess the extent to which the legal,
  institutional and economic conditions for a
  Single Market are now in place

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Measuring the effects of EU integration -
techniques

• Ex ante studies predict likely trade changes
  using models with changes in tariff levels and
  demand and supply elasticities
• Partial or general equilibrium models
• Common ex post effect is the residual
  imputation method the difference between
  observed trade and predicted trade in the absence
  of integration (the counterfactual or anti-monde)
• Establishing the anti-monde can be done with
  various degrees of sophistication from trend
  analysis or import functions through gravity
  models
• Presumption is that unexplained changes are due
  to integration

3
Measuring the effects of forming the EU - results

• Most early studies concentrate on trade effects
  implicit assumption is that welfare effects are
  proportional
• Most studies concentrated on manufactured foods
  ignoring agriculture understates trade diversion
• While trade effects are shown to be substantial,
  welfare effects are very small a consequence of
  the perfect competition assumption
• Assume trade creation (including consumption
  effect) of 10 billion (median estimate from El
  Agraa Table 7.6) and EU tariff of 12 even
  complete liberalisation yields net gain of only
  1.2 billion, trivial in context of EU GDP
• Irish experience suggests membership effects
  dominated by FDI, transfers etc., not covered by
  traditional theory

4
Evaluating the effects of the single market -
Cecchini report

• Cecchinis classification of market barriers
  contrasted with White Papers legal
  classification
• Tariffs
• Quantitative restrictions
• Cost-increasing barriers
• Market-entry restrictions
• Market-distorting subsidies
• Benefits are two main kinds
• comparative advantage benefits due to changes
  in relative prices when barriers are removed
• market integration benefits due to reduction in
  monopoly rents, X-inefficiency and reaping of
  scale economies

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Estimates of the benefits of removing barriers to
the SEM
Source Emerson p. 203
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Summary and review of Cecchini Report studies

• Hugely complex economic analysis, 24 reports in
  all
• Criticised for over-optimistic assessment of
  likely impact, because assumes full
  implementation of SEM regime
• Criticised for under-optimistic assessment
  because additional positive factors (such as
  dynamic effects from the stimulus to investment
  and a higher long-run rate of growth) are
  ignored.
• What, in hindsight, were the effects? 1996
  Commission Review of the SEM attempted to answer
  this question.

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1996 Commission Review of the Single Market (1)

• Novel features
• asked businesses what they thought of the Single
  Market
• considered locational effects in addition to the
  allocation effects dealt with by Cecchini
• The state of opinion
• savings from abolition of frontiers partially
  offset by setting up new VAT administration
  system
• many enterprises still had difficulties with
  technical standard requirements
• very little intra-EU growth in public procurement
  business

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1996 Commission Review of the Single Market (2)

• Economic effects
• Estimated boost of between 1.1 and 1.5 of GDP
  due to SEM, generating some 300,000 to 900,000
  exra jobs.
• relatively short time horizon to evaluate welfare
  effects. Also lots of noise due to extraordinary
  other events

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1996 Commission Review of the Single Market (3)

• Locational effects
• evidence of convergence helped at least in part
  by the SEM
• no convincing correlation between the nature of
  trade creation (intra-industry or inter-industry)
  and convergence performance.
• Draws negative conclusion that integration
  process as such is not harmful to successful
  development, for those countries that have the
  appropriate conditions for sustained growth in
  the first place

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2002 study Ten Years Without Frontiers

• Estimated EU GDP in 2002 is 1.8 percentage points
  or 165 billion higher thanks to Internal Market
• About 2.5 million jobs created since 1992 which
  otherwise would not have been created
• Evidence of growing price convergence, increased
  merger and FDI activity across frontiers
• Specific benefits in network industries,
  transport, public procurement (?), financial
  services (??)

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Future challenges

• Growth in intra-Community trade has slowed
  dramatically in recent years
• Process of price convergence observed since 1990s
  stalled since 1999
• Transposition deficit above the Barcelona
  target (1.5 or less) and growing number of
  infringements
• Single market in financial services still far
  from reality
• Tax obstacles to cross border activity

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Outlook for the single market

• Check out latest developments on Commission
  single market web site http//europa.eu.int/comm/i
  nternal_market/en/index.htm
• (click on the Update button on this website for
  information on the Single Market scoreboard,
  access to the Ten Years without Frontiers Report,
  etc).