Similarity in trade structures,integration and catching‐up1

In this paper, we look at the role of export composition in the growth process, considering how increased similarity in trade structure among countries can induce catching‐up in income levels in a group of countries in transition. We analyze the sectoral export patterns of the Central and Eastern European countries (CEECs) by comparing them to those of the current members of the European Union (EU), focusing on countries’ specialization as suppliers for the EU market, and we assess whether similar export patterns foster the catching‐up process of the CEECs. Our main result is that similarity in export composition has a positive, significant and non‐linear impact on catching‐up, and seems to be driven by the growth of the main export market and delocalization of production more than by other factors.     

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.     

Economic Integration and FDI: An Empirical Analysis of Foreign Investment in the EU and in Central and Eastern Europe

Recent evidence suggests that regional economic integration provides an important stimulus not only to trade, but also to FDI. In contrast, the available theory on FDI does not yet provide empirically testable propositions on the effects of concurrent trade and investment liberalisation. Moreover, given the limits of simulation models, which rely heavily upon parameter choice, in assessing the impact of such liberalisation, there is a need for empirical analysis to identify the principal features of FDI. This paper uses a gravity model approach to assess the impact of the deepening integration between the EU and the CEECs on FDI flows in terms of three key issues. First, we provide systematic estimates of the expected long-term level of FDI in the CEECs. Second, we investigate whether FDI in the CEECs, on the one hand, and source country exports and imports, on the other hand, are complements or substitutes. Finally, we enquire whether an increase in the attractiveness of the CEECs to foreign investors has affected the magnitude of FDI going to other European countries.     

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.     

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.     

Introduction: Is the European Union Capable of Integrating Diverse Models of Capitalism?

ABSTRACT

The causes and consequences of the Euro crisis have led comparative political economy scholars to question whether European integration can accommodate diverse models of capitalism. This special issue addresses two important questions about the compatibility of diverse growth models within the European Union (EU): Are some growth regimes better suited to European integration than others? and does the EU favour a particular constellation of domestic institutions? Contributions within this special issue provide a qualified yes to these questions, concluding that the EU favours export-led growth models whilst it penalises and discourages domestic consumption-oriented growth paths, particularly those that are financed by debt accumulation. While recent comparative capitalism literature highlights that European monetary integration has favoured export-led growth regimes, contributions in this special issue outline that the EU’s prioritisation of export-led growth over domestic demand-led growth is present in other facets of integration, including EU accession, financial integration, the free movement of people, fiscal governance and the Europe 2020 growth strategy. Findings here provide important insights for both the European integration and comparative capitalism literature, highlighting that the unique economic ties being forged within the European project may be problematic for those countries outside northwestern Europe and for workers in low-wage domestic sectors.     

Economic integration and specialization in production in the EU27: does FDI influence countries’ specialization?

The objective of this article is twofold. Firstly, we proceed to an analysis of the evolution of specialization in production in the enlarged EU, taking into account all its 27 member countries. Given their decomposability properties, we use the entropy-based indices to measure countries’ relative specialization and then, given our rather short period of analysis, we use the bootstrap method to analyze the evolution of the specialization index. We first analyze all economic sectors and then, our analysis is more detailed focusing on manufacturing industries. Globally, we find that specialization is decreasing across all economic sectors, while it is increasing across manufacturing industries. Secondly, we study specialization determinants, with a special interest in the impact of foreign direct investment (FDI). For homogeneity reasons, we analyze two separate samples, one including old EU members plus Cyprus and Malta and the other, the CEECs. In order to take into account the endogeneity of most of our independent variables, we use the vector autoregression (VAR) technique and analyse the impulse response functions. Globally, FDIs seem to positively influence countries’ relative specialization, for our both samples and for both economic sectors and manufacturing industries. However, their impact appears weaker than most of the other independent variables, such as the market potential or the relative endowments.     

The real effect of financial crises in the European transition economies1

The aim of this work is to assess the impact of financial crises on output for 11 European transition economies (CEECs). The results suggest that financial crises have a significant and permanent effect, lowering long‐term output by about 12–17 percent. The effect is larger in smaller countries in which the banking sector presented more important financial disequilibria. We also found that fiscal policy has been the most efficient tool in dealing with the crises, whereas the effect of monetary policy has been rather modest. Flexible exchange rates are found to attenuate the impact of the crises in the short and medium term, but to amplify the effect in the long run. International Monetary Fund support is found to moderate the effect in the long run. Finally, the effect in the CEECs is considerably larger than in the EU advanced economies.     

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.     

European Monetary and Fiscal Policies after the EU Enlargement

This paper examines the design of macroeconomic policies after Central and Eastern European countries (CEECs) have joined the EU. We consider scenarios with and without CEECs being members of the European Economic and Monetary Union (EMU) and analyze consequences of different intermediate targets for the European Central Bank. For the fiscal policy variables, we assume that the governments of incumbent and new members either refrain from pursuing active stabilization policies or follow either non-cooperative or cooperative activist fiscal policies. Different scenarios are simulated with the macroeconomic McKibbin–Sachs Model (MSG2 Model), and the resulting welfare orderings are determined. They show that the advantages and disadvantages of different policy arrangements depend strongly on the nature of the shock the economies are faced with. Additional macroeconomic noise resulting from the CEECs' membership of the EMU does not seem to be too much of a problem.     

The effects of company taxation in EU accession countries on German FDI1

This article investigates how company taxation affects German foreign direct investment (FDI) in European Union (EU) accession countries. In 2004 and 2007, 10 former socialist eastern European countries joined the EU. Although the EU integration is associated with increasingly favourable investment conditions, accession countries also pursue active strategies to attract foreign firms. In particular, taxes on corporate income have been significantly reduced during the last decade. We analyse whether corporate tax policies of eastern European countries affect three aspects of multinational activity: the location decision, the investment decision and the capital structure choice. The results suggest that local taxes are negatively related to both location and investment decisions. The analysis of the capital structure confirms that higher local taxes imply higher debt‐to‐capital ratios.     

Inflation convergence in Central and Eastern Europe vs. the Eurozone: Non‐linearities and long memory

In this paper, we consider inflation rate differentials between seven Central and Eastern European Countries (CEECs) and the Eurozone. We test for convergence in the inflation rate differentials, incorporating non‐linearities in the autoregressive parameters, fractional integration with endogenous structural changes, and also consider club convergence analysis for the CEECs over the period 1997 to 2015 based on monthly data. Our empirical findings suggest that the majority of countries experience non‐linearities in the inflation rate differential; however, there is only evidence of a persistent difference in some countries. Complementary to this analysis we apply the Phillips and Sul (2007) test for club convergence and find that there is evidence that most of the CEECs converge to a common steady state.     

The case for international tax co-ordination reconsidered

In a world of high capital mobility, governments may be tempted to undercut each other's capital income taxes to attract capital from abroad. Since such tax competition may have detrimental effects for all countries, European policy makers have debated the introduction of a minimum capital income tax rate within the EU. This paper develops an applied general equilibrium model to estimate the effects of such tax co-ordination on resource allocation, income distribution and social welfare. The model allows for the concern of policy makers that a rise in capital taxes within the EU may cause a capital flight out of Europe. Capital flight will indeed reduce the welfare gain from tax co-ordination within Western Europe, but a positive net gain will remain, although it is likely to be well below 1% of GDP. The gain from co-ordination will be unevenly distributed across European countries, due to differences in economic structures and in the social preference for redistribution. Moreover, even if the median voter's gain from tax co-ordination may be small, the gains for the poorer sections of society may be quite large.     

Macroeconomic variables and the sovereign risk premia in EMU,non-EMU EU,and developed countries

This project studies and models key macroeconomic variables and their impact on sovereign risk premia across select European economies and developed countries. The sample is divided into three groups of countries: those in the European Monetary Union (EMU); the standalone economies outside the EMU but members of the broader European Union (EU); and other developed economies. The main subject of examination across all three groups is the impact of macroeconomic variables on sovereign borrowing costs. EU countries have experienced high financial stress and a rapid rise in the credit default swaps (CDS) spreads during the EMU debt crisis. A nonlinear vector smooth transition autoregressive model is applied to investigate such a regime change in the finance-output link using sovereign CDS and industrial production index. The paper finds that regime-switching takes place rather suddenly in most EMU countries. The study concludes that due to the potential spillover effects in the EU as a whole, the individual country macroeconomic indicators were less reflected in the financial stress and spillover and contagion effects became dominant.     

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).     

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.     

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.     

Determinants of foreign direct investment: empirical evidence from EU accession candidates

This study examines bilateral foreign direct investments (FDI) between the members of the European Union and eight central and east European candidate (CEEC) economies in transition, awaiting accession into the European Union (EU). Cross-section data were obtained for Bulgaria, Czech Republic, Estonia, Hungary, Poland, Romania, Slovak Republic, and Slovenia for 1997. Once the main characteristics of FDI recipient and donor nations are identified in a bilateral framework, it will be feasible to predict future FDI inflows. This study reveals that the key determinants of FDI inflows in CEECs are size of the host economy, host country risk, labour costs in host country, and openness to trade. Countries that are receiving fewer foreign investments could make themselves more attractive to potential donor nations by focusing on some of the key determinants identified by this study.     

The Role of Trade in Intra‐Industry Productivity Growth—the Case of Old and New European Union Countries

The purpose of this paper is to evaluate the role of trade in productivity growth in a sample of 30 sectors in 25 EU countries in the period of rapid East–West integration (1995–2007). Shift‐share analysis is used to show that changes in value added per hour worked in these countries appear to be mainly due to positive developments (rising productivity) within single industries and only to a lower extent result from a shift towards higher productivity activities. Trade is found to be an important positive determinant of intra‐industry productivity growth in European countries. Exports and imports alike can be associated with efficiency gains, but intermediate good exchange and trade with New Member States exert a particularly strong influence on intra‐industry productivity growth in the EU.     

The Reconstruction of South East Europe,the Stability Pact and the Role of the EU: An Overview

In the aftermath of the Kosovo crisis, the international community agreed on a Stability Pact to provide a framework that will contribute to the long-term security and stability of the whole region of South-East Europe (SEE). The idea is to bring the region closer to the European integration process through new institutional relations with the European Union (EU), as well as through the provision of assistance for reconstruction and development. As a contribution to the Stability Pact, the EU has announced the upgrading of its regional approach to the countries of the so called Western Balkans: Albania, Bosnia-Herzegovina, Croatia, Macedonia (FYROM), and Federal Republic of Yugoslavia (Serbia/Montenegro). Under the new Stabilization and Association Process all these countries could in principle become eligible to start negotiations for a new type of association agreement with the EU. The new Stabilization and Association Agreements would offer the countries in the region improved prospects for international trade with the EU, which would potentially provide increased export revenues to finance the reconstruction of the region from its own resources. However, in keeping with the previous regional approach, strict conditions have been laid down for countries to open negotiations on the new association agreements, including progress in democratization and economic reform. In addition, the new policy framework also emphasises the need for the development of intra-regional cooperation between the countries concerned. The paper presents a discussion and evaluation of the new policy approach towards regional cooperation and prospects for European integration in the context of the problems of economic reconstruction, democratic transition and consolidation in South East Europe.