Explaining regional disparities in Central and Eastern Europe

The paper analyses the determinants and the evolution of income disparities across regions within Central and Eastern European Countries (CEECs) over 1991–2011. We add to the literature in different ways. First, we adapt the categories that Rodriguez‐Pose used for studying convergence among old EU members to CEECs regions. This allows us to assess the relevance of geo‐sectoral groups (urban areas, old industrialized areas and peripheral areas) for newcomer regions. Second, we introduce a new category, that of ‘successful Foreign Direct Investment (FDI)‐based restructuring’ in order to capture regions that, often through considerable FDI, manage to reconvert their old industrial base. We then analyze whether this group helps understand catching‐up/falling behind processes in CEECs. We test the relevance of these groups by means of both non‐parametric and spatial regression analyses. We find that they help explain the increase in within‐countries’ regional disparities especially after the turn of the century.     

Economic integration and similarity in trade structures

In this paper, we look at the similarity of the trade structures toward the EU market between four CEECs and the EU15. We evaluate the appropriateness of different indices to compare export flows—correlation indices and distance metrics—opting for the use of the Bray-Curtis semi-metric. We examine both how the export composition of a country has changed over time and how the export composition has changed with respect to the EU15 export composition. Finally, we test if the dynamics of sectoral distribution of the CEECs’ exports is related to the role acquired by processed trade in the 1990s. We give evidence that processed trade is crucial in explaining changes in the overall structure of exports of transition countries, and that greater economic integration in terms of trade flows and processing trade does not always lead to greater export similarity.

Monetary integration strategies and perspectives of new EU countries

The poor record of economic convergence between the euro area and those countries that joined the European Union (EU) in May 2004 raises serious doubts about the possibility for the latter countries to adopt the European single currency in the not too distant future. In fact, many new EU countries would have to make considerable efforts in order to fulfil all EMU criteria by the end of the present decade. These efforts could lead to output and growth losses in these countries, which would run counter to their catching‐up process with respect to the rest of the EU. To avoid a number of shortcomings elicited by the obligation to respect the convergence criteria in the short term, and also to avoid the financial instability risks implied by participation in the ERM II, this paper suggests an alternative plan for integrating the new EU countries monetarily. The plan consists in creating a European settlement agent in charge of the final payment of the new EU countries’ international transactions. These transactions would be settled using an international monetary standard whose creation would eliminate instability on the foreign exchange market by its being the yardstick that the current international monetary system lacks.     

A sequential approach to regional integration: The European Union and Central and Eastern Europe

This paper develops a theory of optimal sequencing of regional integration and applies it to the specific question of Central and Eastern European countries (CEECs) and the EU. We show that the timing of transition and integration has implications for the long-term trade structure of Europe. In this model the interest to integrate the CEECs comes from harmonization of policies to attract industries. Without integration, European countries will try to inefficiently protect their industries. Because of the transfers implied by the CAP and the Structural Policies, the EU delays enlargement until the CEECs have sufficiently converged. CEECs might at this point prefer to stay outside the EU and attract industries by offering them more generous protection than the EU. Such timing may be inefficient ex ante for all countries because it may prevent full European integration in the long run, inducing firms to relocate outside of the EU and governments in the EU and the CEECs to inefficiently protect industry. During the transition, all countries benefit from regional integration among the CEECs.     

R&D intensity of investment across Europe before and after the crisis

In this paper we investigate the comovements between the R&D intensity of private investment and GDP growth in different European Union (EU) areas over the period 1999–2014. Our empirical analysis shows that only core countries display a common countercyclical mechanism leading to an increased intensity of R&D over prolonged downturns. The lack of an effective countercyclical pattern of R&D intensity over the evolution of GDP growth in periphery countries makes this area highly vulnerable to persistent recessions, with potentially harmful consequences for long‐term growth. For recent EU members the evidence of acyclicality should be evaluated in the light of the catching‐up process still at work in this area. Our analysis suggests that any successful EU innovation policy should not disregard the potential divergence in R&D performance due to the dispersion of the countercyclical properties of the investment intensity in productivity enhancing activities in the different EU areas.     

Long‐run determinants and misalignments of the real effective exchange rate in the EU

This paper explores the role of fundamentals, included in the transfer effect theory, in explaining medium/long‐run movements in the real effective exchange rates in the EU over the period 1994–2012, together with an analysis of the misalignments. We use heterogeneous, cointegrated panel frameworks in static and a dynamic setup. We find that the coefficients of the determinants are extremely different across groups and the transfer theory does not always hold. The core countries have been undervalued for almost the whole period; the periphery has experienced high rates. The misalignments in the CEECs are still wide and reflect the catching‐up process.     

Trade liberalization and institutional reforms1

The accession of Central and Eastern European (CEE) countries to the European Union (EU) is expected to lead to the new member countries becoming more like the older members, including in terms of trade. In this paper, we focus on two factors promoting CEE–EU trade integration: trade liberalization and institutional reforms. Measures of trade liberalization undertaken by both parties during the 1990s were very substantial, but did not always produce the expected upsurge of regional trade flows. Much less progress has been made in improving the functioning of CEE institutions (e.g., progress in the privatization process or in reducing corruption). Countries where most important changes at the institutional level occurred were also those that most increased their trade with the EU. Comparing the impact of these two factors, we find that improving institutions in CEE countries can generate as much trade as the removal of all tariff and non‐tariff barriers. The paper also addresses the issue of the presence of reversed causality between trade and institutions, and the pro‐trade effect of institutional similarity.     

Trade integration and the EU economic membership criteria

The purpose of this paper is to consider whether the European Union (EU)'s economic membership criteria for the Central and Eastern European countries (CEECs) and Cyprus (the Candidate Countries) are fulfilled. To this end, I examine the actual and potential levels of trade between the Candidate Countries and the EU countries using the gravity model. The results show a high degree of trade integration between all Candidate Countries and the EU, indicating that the Candidate Countries would not face any serious difficulties in coping with the competitive pressure and market forces within the Union in the medium term. The European Commission, however, suggested the contrary for some of the Candidate Countries in its opinions of 1997.     

Real Convergence and European Integration: The Experience of the Less Developed EU Members

This study aims at providing an assessment about real convergence across countriesand regions in the EU, focusing more specifically on the four cohesion EU members.The results show that in the course of the last few years a process of convergence hastaken place between the per capita income levels of the EU regions and also, to a largerextent, of the Member States. Nevertheless, advances in real convergence are largelydetermined by the growth strategy implemented by the countries themselves. Lastly,our study suggests that the Community's regional policy has played a significant rolein favor of real convergence between the Member States of the EU. One importantlesson to be drawn is that the accession is likely to contribute significantly to improvingthe possibilities of the current Central and East European countries (CEECs) candidatesin aligning their per capita income levels with those of the EU members.     

Stock Market Integration between Three CEECs,Russia, and the UK

This paper estimates a trivariate VAR‐GARCH(1,1)‐in‐mean model to examine linkages between the stock markets of three Central and Eastern European countries (CEECs), specifically the Czech Republic, Hungary, and Poland, and both the UK and Russia. The adopted framework allows to analyze interdependence by estimating volatility spillovers, and also contagion by testing for possible shifts in the transmission of volatility following the introduction of the euro and EU accession. Further evidence on possible changes in the transmission mechanism (namely, on whether there is contagion) can be obtained by examining the conditional correlations implied by the estimated model over different time periods. The empirical findings suggest that there is significant co‐movement (interdependence) of these CEEC markets with both the Russian and the UK ones. Furthermore, whilst the introduction of the euro has had mixed effects, EU accession has resulted in an increase in volatility spillovers between the three CEECs considered and the UK (contagion).     

The monetary approach to exchange rates in the CEECs1

A panel dataset for six Central and Eastern European countries (Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) is used to estimate the monetary exchange rate model with panel cointegration methods, including the Pooled Mean Group estimator, the Fully Modified Least Square estimator and the Dynamic Least Square estimator. The monetary model is able to convincingly explain the long‐run exchange rate relationships of a group of CEECs, particularly when this is supplemented by a Balassa–Samuelson effect. Our estimated long‐run monetary equations are used to compute equilibrium exchange rates. Finally, we discuss the implications for the accession of selected countries to the European Economic and Monetary Union.     

A note on productivity change in European cooperative banks: the Luenberger indicator approach

The Luenberger productivity indicator is employed to estimate and decompose productivity change in a sample of cooperative banks operating in 10 EU member states. An average annualised productivity growth of 2.59% is reported between 1996 and 2003, though there is heterogeneity in growth rates across countries. Generally speaking, productivity growth is driven by technological change. However, cooperative banks in southern European banking markets benefit as much from efficiency growth or catching‐up with industry best practice. The results suggest that technology sharing arrangements and greater competition arising from deregulation are positive contributors towards productivity change.     

CEEC growth projections: Certainly necessary and necessarily uncertain*

In this paper we discuss the necessity for an indirect approach to assess the growth and convergence prospects of ten Central and Eastern European countries (CEEC10). Ongoing structural changes in these countries and the recent European Union membership of eight countries in the sample have to be taken into account in growth projections. Our indirect approach consists of basing growth projections for the CEEC10 on growth equations estimated for the incumbent EU member states. The study improves upon current practice in two ways. First, growth equations are estimated for the EU14 and not on a large heterogeneous panel that includes many countries unrelated to the CEEC10. Second, by means of a variety of equations and scenarios we assess the uncertainty inherent in such projections. We present growth‐rate and convergence time distributions. The mean convergence times are in line with previous findings. The growth‐rate and convergence time distributions are bi‐modal, reflecting the possibility of two distinct growth paths, depending upon economic policy choices.     

The drivers of foreign currency‐based banking in Central and Eastern Europe

Foreign currency (FX)‐based loans and deposits became very popular in Central and Eastern European countries (CEECs) over the 2000–2011 period. In this paper, I simultaneously examine the demand‐side (consumer‐related) and supply‐side (bank‐related) determinants of the quick spread of FX banking. I use a newly constructed dataset on FX and domestic currency loans, deposits and interest rates, covering 16 CEECs overtime. Local‐FX interest rate and market share spreads are: (1) lower in managed currency regimes; (2) strongly affected by the prevalence of FX funding, currency mismatch and FX banking restrictions, and (3) wider after economic crises.     

Foreign bank entry,bank efficiency and market power in Central and Eastern European Countries1

This article analyses the implications of the recently observed sharp expansion of foreign banks in the Central and Eastern European Countries (CEECs) as measured by equity ownership. We show that the mode of foreign entry has a pivotal impact on the post‐entry performance of banks in CEECs. Foreign greenfield banks are characterized by superior cost efficiency, compared with domestic and foreign‐acquired banks. The efficiency of foreign‐acquired banks deteriorates in the initial year of acquisition, but improves thereafter. Banks acquired by foreigners have less market power relative to domestic and foreign greenfield banks. Overall, the CEEC banking sectors have benefited from the increased foreign bank participation, both in terms of higher efficiency and more competition.     

Export surges

How can developing countries stimulate and sustain strong export growth? To answer this question, we examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least 7 years. We find that export surges in developing countries tend to be preceded by a large real depreciation, which leaves the exchange rate significantly undervalued. In contrast, in developed countries, the role of the exchange rate is less pronounced. We examine why the exchange rate is important in developing countries and find that the depreciation is associated with a significant reallocation of resources in the export sector. In particular, depreciation stimulates entry into new export products and new markets. These new exports are important, accounting for over 40% of export growth on average during the surge in developing countries. We argue that a large real depreciation induces firms to expand the product and market space for exports.     

The quality and variety of exports from the new EU member states

The goal of this article is to evaluate the variety and quality of exports from the new EU member states (NMSs) in the period 1999–2009. The practical relevance of such an analysis is threefold: recent studies underline the importance of export variety for economic growth; empirical results show that export variety was influenced by the EU membership; and looking separately at export quality permits a better understanding of price competitiveness. Our results show that all NMSs significantly increased the average number of brands exported to the EU market, the largest increases being observed in 2004 and after. This indicates that integration into the EU market occurs in the extensive as well as the intensive dimension. We also find that all NMSs increased the average quality of their exports during the decade studied although there are differences between countries. Thus, a large part of the increase in the prices of exports from NMSs resulted from improving quality and did not result in a loss of competitiveness. Finally, estimates of relative quality are much more stable than relative prices, suggesting that our measure of relative quality is better than the traditional proxy.     

On competing theories of economic growth: cross-country evidence

In the recent literature on economic growth, four approaches compete to explain growth trends in per capita GDP of the world set of countries: (1) the Solovian approach; (2) the New Theory of Endogenous Growth; (3) the Abramovitz–Baumol ‘catching up’ approach; (4) the Kaldor approach of increasing returns and cumulative causation. Approaches (3) and (4) are formalized here in a single model and then tested against approaches (1) and (2) on a common database and sample of countries. The main conclusions are the following: that labour is not the limiting factor on growth, as implied by (1) and (2); that catching up is an important and a non-declining process; that increasing returns to output rather than to capital are very important and accelerate the catch-up with the US trend; that a lack of social capabilities and technological push may reverse catching up into falling behind with respect to the US productivity level; and that the pattern of growth changes between 1960–73 and 1973–88 because physical investment becomes less important while R&D becomes more important, and because cumulative causation through export growth ceases.     

Dimensions of quality upgrading

The impact of the Central and Eastern European (CEE) economies’ trade integration with European markets on CEE trade structures has been studied extensively. These studies frequently observe a quality upgrading of CEE exports. In this paper we consider three dimensions of quality upgrading: upgrading across industries, upgrading across different quality segments within industries and, finally, product upgrading within quality segments inside industries. For the analysis we partition industries into quality segments based on EU‐15 import unit values. The results for ten CEE countries (comprising the CEE‐5, the Baltics and South East Europe) and thirteen industries suggest fundamental differences, both across country groups and across the three different notions of quality upgrading. The CEE‐5 show no evidence of entering a ‘low‐quality trap’ in all three dimensions. By contrast, while there is a general catching‐up process across industries and inside quality segments, the second notion of low‐quality specialization may be applicable within the high‐tech industries to the performance for the Baltics and South East Europe as a group.     

UNEMPLOYMENT, HYSTERESIS AND TRANSITION

In this paper, we quantify the degree of persistence in the unemployment rates of transition countries using a variety of methods benchmarked against the EU. Initially, we work with the concept of linear ‘Hysteresis’ as described by the presence of unit roots in unemployment as in most empirical research on this area. Given that this is potentially a narrow definition, we also take into account the existence of structural breaks and nonlinear dynamics in unemployment. Finally, we examine whether CEECs' unemployment presents features of multiple equilibria, that is, if it remains locked into a new level whenever some structural change or sufficiently large shock occurs. Our findings show that, in general, we can reject the unit‐root hypothesis after controlling for structural changes and business‐cycle effects, but we can observe the presence of a high and low unemployment equilibria. The speed of adjustment is faster for CEECs than the EU, although CEECs tend to move more frequently between equilibria.