Real Convergence,Capital Flows,and Competitiveness in Central and Eastern Europe

The paper scrutinizes the role of capital flows for competitiveness in the new EU member states in the context of real convergence. For this purpose it extends the seminal Balassa–Samuelson model by international capital markets to trace cyclical deviations of real exchange rates from the productivity‐driven equilibrium path. Panel estimations for the period from 1998 to 2009 reveal strong evidence for the Balassa–Samuelson effect and mixed results for the role of capital flows for international competitiveness of the Central and Eastern European countries.     

Technology Foresight Activities in Korea and in Countries Closing the Technology Gap

This article discusses technology foresight in selected countries which were politically dependent (colonial) before World War II and considered as “under-developed” in the post-war period. Most of them show considerable economic dynamism in the 1990s, which is not always based on their own scientific and technological capability. For this group of countries, national exercises in technology foresight are likely to be an important tool in planning the strategic direction for science and technology development in order to catch up economically as well as socially. In Korea, which has recently become an OECD member, comparative advantage based on factors such as low wages and protected industries are no longer effective as the economy is now wide open to the world. Foresight is being used to look at comparative advantages based on Korea’s own knowledge-creating activities. In southeast Asian countries, foresight is still in an infant stage, but most of these have medium-term planning cycles and have undertaken longer-term vision studies. In South Africa, a national foresight project is running, as is an adapting foresight process to make the large national research organization fit. In Latin America, an agenda has been set up which indicates the desire of several countries to engage in foresight activities using different approaches.     

European integration, productivity growth and real convergence

This paper derives a stochastic endogenous growth model to investigate the impact of European Union (EU) integration on convergence and productivity growth. The theoretical model implies both temporary and permanent positive effects of the integration process. The empirical part of the analysis uses structural break tests and data envelopment analysis to examine the accession process of five recent members to the EU15. The results show (i) endogenously identified accession dates as structural breaks, (ii) improved rates of productivity growth after accession over and above the Union benchmark level, and (iii) increased pace of overall growth due to capital accumulation as a result of institutional features of the Union such as Structural and Cohesion Funds. These findings support the theoretical model, implying that economic integration is beneficial for member countries, especially from a long-run perspective, and Cohesion and Structural funds help the new members catch up with the core-EU members’ standard of living.     

The individual and the market: Paul Samuelson on (homothetic) Santa Claus economics

Paul Samuelson often used the term “Santa Claus economics” for mathematical models with empirically unrealistic assumptions. I focus on one particular member of the Santa Claus family that Samuelson was very sceptical about: homothetic general equilibrium models (where all agents have identical homothetic preferences). I argue that Samuelson's concerns about these models provide insights into how he viewed the relationship between the individual and the market, a relationship that has implications for not only his economic theorising, but also his broader political–economic vision. His criticisms are also relevant to some ongoing debates within contemporary economic theory.     

Formal institutions and subjective well-being: Revisiting the cross-country evidence

A long tradition in economics explores the association between the quality of formal institutions and economic performance. The literature on the relationship between such institutions and happiness is, however, rather limited, and inconclusive. In this paper, we revisit the findings from recent cross-country studies on the institution–happiness association. Our findings suggest that their conclusions are qualitatively rather insensitive to the specific measure of ‘happiness’ used, while the associations between formal institutions and subjective well-being differ among poor and rich countries. Separating different types of institutional quality, we find that in low-income countries the effects of economic–judicial institutions on happiness dominate those of political institutions, while analyses restricted to middle- and high-income countries show strong support for an additional beneficial effect of political institutions. Our results bear important implications that we discuss in the concluding section of the paper.     

Some political determinants of economic growth: Theory and empirical implications

This work studies the effects of the political environs on economic growth. The theoretical result from a mathematical model suggests that regime instability, political polarization, and government repression all have a negative impact on economic growth. A cross-sectional analysis of 88 countries over the period of 1974–1990 provides preliminary confirmation of three implications derived from the theoretical model.     

Real exchange rate dynamics in transition economies

The paper analyzes the phenomenon of real exchange rate appreciation that has characterized transition economies. It is shown that the real exchange rate—measured as the relative price of tradables in terms of non-tradables—is affected by adverse initial conditions and structural reforms only in the first 5 years of the transition process. After that period, the so-called Balassa–Samuelson effect seems to dominate the real exchange rate determination. The paper discusses the implications for exchange rate policy and concludes that while for countries of the former Soviet Union a flexible exchange rate regime seems desirable, for Central and Eastern Europe countries a stable exchange rate and even an early move to the adoption of the euro should be considered.     

Productivity growth and inflation in Europe: Evidence from panel cointegration tests

In this paper we investigate the productivity growth – inflation nexus in fifteen European countries over the period 1961–1999 using panel unit root and panel cointegration tests. Emphasis is placed on the distinction between long-run and short-run causality using recently developed tests appropriate for heterogeneous panel. The empirical results are relevant for the role of the EMU and the Treaty of Maastricht in catching up, real convergence, and the future growth prospects of Europe. The policy implications of the findings are discussed in detail.     

Asymmetry and the Problem of Aggregation in the Euro Area

This paper highlights the implications for a single monetary policy when key economic relationships are nonlinear or asymmetric at a disaggregate level. Using data for the EU and OECD countries we show that there are considerable non-linearities and asymmetries in the Phillips and Okun curves. High unemployment has relatively limited effect in pulling inflation down while low unemployment can be much more effective in driving it up. Downturns in the economy are both more rapid and sustained in driving unemployment up than recoveries are in bringing it down. There is considerable variety in these relationships and IS curves across not just countries but also sectors and regions.     

The Feldstein–Horioka puzzle across EU members: Evidence from the ARDL bounds approach and panel data

This paper addresses the saving-investment (SI) correlation for the EU15 member countries, using the ARDL approach and panel regressions. If we accept the Feldstein–Horioka [Feldstein, M. and C. Horioka, 1980, Domestic saving and international capital flows, Economic Journal 90, 314–329.] interpretation of the SI correlation, the evidence from the ARDL approach does not point to any particular direction in terms of country size, or level of development, or economic and capital market structure. Panel regressions yield an SI coefficient in the range of 0.148–0.157. This finding is attributed to higher capital mobility, lower transaction costs in the international capital markets, and the declining status of long-run current account targeting as a primary government objective.     

Tax competition and tax structure in open federal economies: Evidence from OECD countries with implications for the European Union

Tax competition arguments suggest that governments that operate in an open economy (such as local governments) should not and will not rely on non-benefit taxes, such as the income tax. Yet we observe reliance on income taxes by local governments in many countries, and such reliance changes over time. Evidence from a panel data set of 13 OECD countries over the period 1975-1984 suggests that competition between levels of government (resulting in a vertical fiscal externality) and between governments at the same level (resulting in a horizontal fiscal externality) provide some economic rationale for these changes. Moreover, the evidence indicates that the vertical and horizontal fiscal externalities interact. These results have some interesting implications for fiscal policy in the European Union, particularly as the EU continues to evolve. One implication for the EU is that enlargement that increases tax base disparities within the EU (and is not accompanied by an EU-level income tax) will tend to lower national income tax rates, although this must be qualified because it also depends on the mobility of the population. A second implication is that fiscal expansion of the EU to include an EU-level income tax may tend to lower the reliance of national governments on income taxes through the vertical externality, but may also tend to equalize tax bases across countries, and so increase reliance on national income taxes through the horizontal externality.     

Happiness, freedom and control

How do people value freedom of choice? Drawing on economics and psychology the paper provides an hypothesis and empirical evidence on how individuals may value freedom of choice and derive utility from it. It is argued that the degree of perceived control that individuals have over choice – a construct known as the locus of control in psychology – regulates how we value freedom of choice. People who believe that the outcome of their actions depends on internal factors such as effort and skills (the ‘internals’) have a greater appreciation of freedom of choice than people who believe that the outcome of their actions depends on external factors such as fate or destiny (the ‘externals’). We find some evidence in support of this hypothesis using a combination of all rounds of the World and European Values Surveys. A variable that measures freedom of choice and the locus of control is found to predict life satisfaction better than any other known factor such as health, employment, income, marriage or religion, across countries and within countries. We show that this variable is not a proxy of happiness and measures well both freedom of choice and the locus of control. ‘Internals’ are found to appreciate freedom of choice more than ‘externals’ and to be happier. These findings have important implications for individual utility, social welfare and public policies.     

Benefits and Dangers of EU Enlargement

A new macroeconomic evaluation of EU enlargement is undertaken with a world macroeconomic model taking into account all possible integration effects: trade effects, Single Market effects, factor movements (FDI, migration) and the costs of enlargement. Due to the differences in size of the regions involved, on average the CEEC – measured in terms of real GDP – will gain around 10 times more from enlargement than the EU. Hungary and Poland can increase their real GDP by around 8 to 9 percent over a 10-year period, the Czech Republic gains a little bit less (5 to 6 percent). The EU on average would gain around 0.5 percent of real GDP over a 6-year period. Although, on average enlargement is a win-win game, the impact is quite different in the separate EU member states, with Austria, Germany and Italy gaining the most and losses for Spain, Portugal and Denmark. Hence, EU enlargement may not only be beneficial but might be a risky undertaking. Due to the regional different impact, enlargement acts like an exogenous shock leading to asymmetric disturbances in the EU. This could pause the process of business cycle synchronisation and might impair monetary policy in Euroland at the beginning of the enlargement process. A two-step integration of the CEEC into the EU – first the participation in the Single Market and only later into the EMU – is therefore preferable under the aspect of macroeconomic stability in Euroland.     

Monotone imitation dynamics in large populations

We analyze a class of imitation dynamics with mutations for games with any finite number of actions, and give conditions for the selection of a unique equilibrium as the mutation rate becomes small and the population becomes large. Our results cover the multiple-action extensions of the aspiration-and-imitation process of Binmore and Samuelson [Muddling through: noisy equilibrium selection, J. Econ. Theory 74 (1997) 235–265] and the related processes proposed by Benaı¨m and Weibull [Deterministic approximation of stochastic evolution in games, Econometrica 71 (2003) 873–903] and Traulsen et al. [Coevolutionary dynamics: from finite to infinite populations, Phys. Rev. Lett. 95 (2005) 238701], as well as the frequency-dependent Moran process studied by Fudenberg et al. [Evolutionary game dynamics in finite populations with strong selection and weak mutation, Theoretical Population Biol. 70 (2006) 352–363]. We illustrate our results by considering the effect of the number of periods of repetition on the selected equilibrium in repeated play of the prisoner's dilemma when players are restricted to a small set of simple strategies.     

Je t'aime, moi non plus: Bilateral opinions and international trade

This paper studies the relationship between bilateral trade patterns and opinions. It uses the Eurobarometer public opinion surveys published by the European Commission, which provide data on the share of the population in each EU15 member country in favour of each CEEC joining the EU. Our results first suggest that bilateral opinions have a statistically robust and relatively large effect on imports, even when standard and new covariates capturing proximity between countries are controlled for. We interpret this effect as reflecting a positive impact of “bilateral affinity” on trade patterns. We also show that it is possible to go some way towards explaining the variance in bilateral opinions among our sample. Last we provide some preliminary attempt to determine causality between bilateral opinions and imports.     

Non-Keynesian Effects of Government Expenditure on Output in Bulgaria: An HP Filter Approach

A large body of recent studies has explored the presence of non-Keynesian fiscal policy effects in advanced European economies, while relevant empirical sources on post-communist economies are scarce. In the context of the constraints imposed by the SGP, it is crucial for EU New Member States and acceding countries to estimate the macroeconomic impact of discretionary fiscal intervention. This article focuses on the effects of government expenditure on short-term output in the Bulgarian economy a few years prior to EU accession. It finds that government investment affects real growth in a Keynesian fashion while transfers and public consumption exhibit non-Keynesian behaviour. The cyclically adjusted components of the general government budget, computed by HP filter, form the basis of the analysis. The results support the conclusions of relevant studies about advanced European economies.     

Agricultural enlargement of the EU under Agenda 2000: Surplus of farm labour versus surplus of farm products

In the Commission's proposals for reform of the Common Agricultural Policy (CAP) and enlargement of the EU (Agenda 2000), the agriculture of Central and Eastern Europe (CEE) is denied future access to compensatory payments for cuts in support prices in the EU15. To offset this, the acceding countries are promised a similar net amount of structural aid for their economy and society at large. This dual treatment aims at preventing agricultural surpluses and intersectoral distortion after accession. However, the actual situation and dynamics of agriculture in Central Europe (CE) compared to that in the EU does not support the surplus assumption globally, but only for certain products, chiefly grains. So far overlooked, but nevertheless, a key obstacle opposing competitive recovery, is the tendency of the dual, post-communist agrarian structures, faced with high rural unemployment, to protect long-term underproductive farm labour to the detriment of capital and land remuneration, mainly in livestock production. This configuration is supported by specific trade and land protections, and loose qualittative regulations that will be challenged by the EU enlargement. So, after accession under the Agenda 2000 schedule, it seems likely that CEE countries will achieve European competitiveness only at the cost of some recession, further deterioration of trade balances with the EU 15 and sharp decreases in farm employment levels. These factors would chiefly affect livestock production which, combined with crop intensification, is likely to result in a substantial increase in grain surpluses. Later on, the enlarged EU will have to bear the inevitable social consequences that transitional periods after accession might otherwise have postponed.     

Beyond Balassa and Samuelson: real convergence,capital flows,and competitiveness in Greece

To better understand the convergence process prior and since the European financial and debt crisis, we scrutinize the role of capital flows for competitiveness in Greece and a set of six other euro area member countries (Portugal, Latvia, Estonia, Lithuania, Slovenia and the Slovak Republic). For this purpose the paper extends the seminal Balassa–Samuelson model by international capital markets with a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to make real wages increase beyond productivity increases. The augmented Balassa–Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 reveal correlations in line with the Balassa–Samuelson effect, if Greece is excluded from the panel. For Greece, this in turn implies indication in favour of a credit-driven real wage increases beyond productivity increases what we call a “pseudo” Balassa–Samuelson effect.     

Opening services markets within Europe: Modelling foreign establishments in a CGE framework

Foreign direct investment (FDI) in services is often more important to supply foreign markets than cross-border trade. A complete analysis of services liberalization therefore requires the modelling of FDI. This paper presents the treatment of FDI in our CGE model WorldScan based on the ideas of Petri [Petri, P.A., 1997. Foreign direct investment in a computable general equilibrium framework. Paper Prepared for the Conference, Making APEC work: Economic Challenges and Policy Alternatives, March 13–14. Keio University, Tokyo] and Markusen [Markusen, J.R., 2002. Multinational Firms and The Theory of International Trade. MIT Press] that firms which establish affiliates abroad also transfer firm-specific knowledge. Consequently, capital owned by suppliers from home and foreign countries are not perfect substitutes. We apply this model to the proposals of the European Commission to open up services markets. Even when FDI in services could increase by 20% to 35%, the overall economic impact is limited. Our assessment suggests that GDP in the EU25 could increase up to 0.4%. These effects could be up to 0.8% higher if foreign capital also increases the overall productivity of the services sector.     

Productivity in the tourism industry

This paper analyzes the efficiency of a Portuguese public-owned hotel chain, Enatur. It applies data envelopment analysis (DEA) to estimate total factor productivity (TFP) change, while breaking it down into technical efficiency and technological change. The benchmarking procedure used is an internal one, which compares hotels with each other. For the period 1999–2001, the hotels are ranked according to their total productivity change. It is concluded that some hotels experienced productivity growth, while others faced a decline. Some implications beneficial for managerial policies were drawn from this study.