Economic%20Integration%20and%20Growth - PowerPoint PPT Presentation

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Economic%20Integration%20and%20Growth

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Integration greater economic and political stability ... Lejour, de Mooij and Nahuis (2001, CPB document 011/2001): CGEM model, effects of enlargement ... – PowerPoint PPT presentation

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Title: Economic%20Integration%20and%20Growth


1
Economic Integration and Growth
  • Jan Fidrmuc
  • Brunel University

2
Growth Effects of Integration
  • Does European integration make countries growth
    faster?
  • Allocation effect
  • Integration removes barriers to movement of goods
    and factors of production ? more efficient
    allocation of resources ? higher output.
  • Accumulation effect
  • Integration ? greater economic and political
    stability ? investment less risky ? lower
    interest rates (lower risk premium) ? more
    investment ? higher growth and higher output per
    person.

3
Solow growth model
  • Due to Solow (1956) and Swan (1956).
  • Neoclassical production function with CTRS and
    labor-augmenting technology YF(K,AL)
  • Constant savings rate s,
  • Constant depreciation rate d,
  • Constant population growth rate n
  • Constant rate of technological progress g
  • It is convenient to carry out the analysis by
    relating all variables to effective labor, AL
  • kK/AL and yY/ALf(k)

4
Solow diagram
The inflow of new capital and how it varies with
K/AL
Outflow of capital per AL, constant depreciation
rate
Assume constant savings rate, s
5
Allocation Effect
  • Integration allows resources to be allocated and
    used more efficiently
  • Given amount of resources therefore produces more
    output
  • f(k) curve shifts up and so does sf(k) curve
  • Equilibrium value of k increases
  • Output per worker rises
  • Growth accelerates until the new equilibrium is
    reached.

6
Induced capital formation effect, i.e. medium-run
growth bonus
f(k)
E
y
C
f(k)
yc
Allocation effect
y
(dng)k
B
sf(k)
D
sf(k)
A
k
k
k
7
Accumulation Effect
  • Integration makes investment in Europe more
    attractive and safer
  • Risk premium and therefore interest rates fall
  • Better institutional environment
  • Increased political and economic stability
  • Membership in the Eurozone
  • Savings rate increases sf(k) curve moves up (but
    f(k) curve stays put), k rises
  • Growth accelerates until the new equilibrium is
    reached.

8
Medium-run growth bonus
f(k)
D
Y/L
Y/L
(dng)k
B
sf(k)
C
sf(k)
A
k
k
k
9
Empirical Estimates
  • Customs unions raise trade flows among members by
    around 50
  • Rose (2000) monetary union, on average, doubles
    trade among members of union.
  • Rose and Stanley (2005) meta-analysis, currency
    union raises trade by between 30 and 90
  • Frankel and Rose (2002) 1 increase in trade is
    associated with 1/3 increase in per-capita
    income

10
Empirical Estimates
  • Lejour, de Mooij and Nahuis (2001) CGEM model,
    effects of enlargement
  • Gain from Association Agreements (i.e. except
    agriculture and food) 2.6 of GDP in the
    candidate countries and 0.1 in the EU
  • Gain from full trade liberalization and customs
    union 2.5 in CEECs and 0 in the EU
  • Removal of informal trade barriers use gravity
    model of trade to estimate tariff equivalent of
    formal informal trade barriers
  • CEEC exports to EU will rise by 50-65, EU
    exports to CEEC by 51 overall exports will rise
    by 30-44 and 2, respectively
  • GDP rises by 5.3 in CEECs and 0.1 in the EU

11
Empirical Estimates
  • Baldwin, Francois and Portes (1997, Econ Policy)
  • Assume enlargement will bring about 10 reduction
    in cost of trade
  • Predict integration effects using CGEM
  • Conservative scenario GDP increase by 1.5 in
    CEECs (CZ, SK, PL, HU, SI, BG, and RO) and 0.2
    in the EU15
  • Optimistic scenario, allowing for a risk-premium
    effect (CEECs to have the same risk premium as
    Portugal) GDP gain 19 in CEECs and 0.2 in
    the EU15

12
Spain and Portugal
13
Ireland
14
Greece
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