Private savings and transition

After the collapse in the early transition years, saving rates in Eastern European EU‐accession countries have recovered strongly. But is private saving in these countries now driven by the same forces as in the EU? A GMM estimator is applied to analyze the determinants of private saving in both country groups. The main results are: saving rates are rather persistent; income growth increases saving, whereas public saving crowds out private saving. There is evidence that in both country groups domestic saving and foreign capital operate at least partly as substitutes, which is an indicator for international financial integration. The long‐run effects of income growth and public saving are larger in the EU‐15 than in the EU‐accession countries.     

THE SPATIAL STRUCTURE OF INCOME INEQUALITY IN THE ENLARGED EU

This study examines how personal disposable income is distributed across regions, countries and larger geographical areas in the EU25 and how this distribution changed during the second half of the 1990s. Moreover, it assesses the "statistical" effect resulting from the enlargement of the European Union, and therefore the community of people for which inequality is measured. A three-level spatial decomposition of the overall personal inequality in the EU reveals that a fifth of its amount is attributed to the east–west income gap and that intra-regional inequality accounts for three quarters. The study detects a convergence of both average national income levels and within-country personal income inequality. Inequality is rising primarily in the Scandinavian social-democratic welfare states and decreasing in the Mediterranean countries of the EU15. In Eastern Central Europe, the rapid growth of inequality which had been observable during the first years of transition has come to an end.     

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.     

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.     

European Integration and Inequality among Countries: A Lifecycle Income Analysis

This paper analyzes the effects of the enlargements of the European Union on inequality using an approach based on individuals' lifecycle incomes. This allows one to consider the effect of different rates of growth and survival rates. Inequality in terms of permanent income was substantially less than in current per capita income at the time of all the enlargements except those of the last 10 years. The results point to the key role of policies that stimulate growth in the less developed countries. With an annual β‐convergence of 2% in current income, inequality in permanent income would be less than one third of what it is now.     

Kaldor's 1970 Regional Growth Model Revisited

Kaldor's 1970 paper ‘The Case for Regional Policies’ was republished in the 60th anniversary volume of the Scottish Journal of Political Economy. This article reflects on the model after more than 40 years, and argues that although it has been criticized for its deterministic nature, it has lost none of its relevance. It predates the ideas of so‐called ‘new’ growth theory, and the new economic geography of Krugman, and provides at least a partial explanation of why growth rates and levels of per capita income between regions and between countries can continue to persist and even widen in contrast to the predictions of orthodox equilibrium theory.     

An assessment of the Europe agreements’ effects on bilateral trade, GDP, and welfare

The so-called Europe Agreements had been enacted in the 1990s to initiate the integration of goods markets between the 15 EU incumbent economies as of 1995 and 10 potential entrants located in Central and Eastern Europe. This paper evaluates the trade, GDP, and welfare effects of these agreements by means of structural analysis of a bilateral trade flow model. The results support three conclusions. First, the agreements exerted significant positive effects on goods trade between the EU15 incumbents and the CEEC and, at the same time, they induced trade redirection from other countries. Second, EU15 GDP responded by an increase of much less than 1% while that in the 10 CEEC increased by several percent in response to the agreements. Third, the effects on welfare were moderate in the EU15 but amounted to more double-digit percentage changes in the involved CEEC.     

International status seeking, trade, and growth leadership

Abstract .  We study a two-country endogenous growth model where the utility of agents in developing countries is affected by consumption gaps with advanced economies. International status seeking tends to revert growth differentials in favour of the developing country. Preferences with endogenous status desire generate convergence in growth rates in the presence of structural gaps and convergence in income levels if productivity differences disappear. This process is driven by declining terms of trade and faster capital accumulation of the status seeker. The model predictions are shown to be consistent with the stylized facts that characterized the growth performance of East Asian economies.     

Outsiders in economic integrationThe case of a transition economy

We use a spatial model of endogenous growth to investigate the likely impact of discriminatory integration between two advanced insider countries on their own welfare as well as on the welfare of an outsider transition economy. A first point is that, since convergence in per capita income levels depends on relative market access and local market size, piece-wise integration causes insider-outsider divergence. Nonetheless, outsiders can gain in absolute terms if integration fosters the global growth rate. We also show that exclusion from a regional agreement and on-going transition have unpredictable joint effects on the structural adjustment, which might even exhibit a swinging behaviour. Such swings may imply large adjustment costs, which can be reduced by careful integration design. With this respect, the asymmetric phasing-out of trade barriers built into the Europe Agreements seems to work in the right direction. Finally, we point out that the predictions of the model in terms of direct investment and terms-of-trade dynamics are broadly consistent with some actual developments in transition economies.     

Long term implications of the ICT revolution: Applying the lessons of growth theory and growth accounting

How big a boost to long run growth can countries expect from the ICT revolution? I use the results of growth accounting and the insights from a two-sector growth model to answer this question. A two-sector rather than a one-sector model is required because of the very rapid rate at which the prices of ICT products have fallen in the past and are expected to fall in the future. According to the two-sector model, the main boost to growth comes from ICT use, not ICT production. Even a country with zero ICT production can benefit via improving terms of trade. I quantify this effect for 15 European and 4 non-European countries, using the EU KLEMS database. The ICT intensity of production (the ICT income share) is much lower in many European countries than it is in the United States or Sweden. Nevertheless the contribution to long run growth stemming from even the current levels of ICT intensity is substantial: about half a per cent per annum on average in these 19 countries. If ICT intensity reached the same level as currently in the U.S. or Sweden, this would add a further 0.2 percentage points per annum to long run growth.     

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.     

Time stability of the beta convergence among EU countries: Bayesian model averaging perspective

This paper analyzes the time stability of the GDP beta convergence in two subsamples: EU27 countries during 1993–2010 and EU15 during 1972–2010. Additionally, the article checks for the strength and stability of influence of particular economic growth factors. In order to address the problem of variables' selection, Bayesian model averaging (BMA) is used while choosing the appropriate variables for the regression. In order to loose the assumption of stability overtime in the regression, interaction terms of particular regressors are introduced with time dummies (the whole sample is divided into time intervals and is allowed for structural breaks). Finally, in order to address the problem of potential inconsistency of “typically used” estimators, the study employs Blundell and Bond's GMM system estimator. The main findings are the following. (1) The EU27 countries converged at the rate of about 5% per annum while the EU15 countries—at 3% p.a., which is an enormous difference as compared with the widely cited 2% rate of convergence. (2) The pure mechanism of conditional convergence of the countries under study was rather constant over time: there were periods of more rapid or slower convergence but the differences were not as huge as one could expect. (3) The considered economic growth determinants exhibited very mixed and differentiated impact on economic growth in various subperiods.     

Climate and Scale in Economic Growth

This paper introduces new data on climatic conditions to empirical tests of growth theories. We find that, since 1960, temperate countries have converged towards high levels of income while tropical nations have converged towards various income levels associated with economic scale and the extent of the market. These results hold for a wide range of tests. A plausible explanation is that temperate regions' growth was assisted by their climate, perhaps historically for their transition out of agriculture into sectors whose productivity converges across countries, while tropical countries' growth is relatively more dependent on gains from specialization and trade.     

Investor protection and income inequality: Risk sharing vs risk taking

This paper studies the relationship between investor protection and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk when lending to firms, thereby improving the degree of risk sharing between financiers and entrepreneurs. On the other hand, by increasing risk sharing, investor protection also induces more risk taking. By increasing entrepreneurial risk taking, it raises income dispersion. By reducing the risk faced by entrepreneurs, it reduces income volatility. As a result, the relationship between investor protection and income inequality is non monotonic, since the risk-taking effect dominates at low levels of investor protection, while risk sharing becomes stronger when more risk is taken. Empirical evidence from up to sixty-seven countries spanning the period 1976–2004 supports the predictions of the model.     

EU Banks Rating Assignments: Is There Heterogeneity between New and Old Member Countries?

We model EU countries' bank ratings using financial variables and allowing for intercept and slope heterogeneity. Our aim is to assess whether “old” and “new” EU countries are rated differently and to determine whether “new” ones are assigned lower ratings, ceteris paribus, than “old” ones. We find that country‐specific factors (in the form of heterogeneous intercepts) are a crucial determinant of ratings. Whilst “new” EU countries typically have lower ratings than “old” ones, after controlling for financial variables we also discover that all countries have significantly different intercepts, confirming our prior belief. This intercept heterogeneity suggests that each country's rating is assigned uniquely, after controlling for differences in financial factors, which may reflect differences in country risk and the legal and regulatory framework that banks face (such as foreclosure laws). In addition, we find that ratings may respond differently to the liquidity and operating expenses to operating income variables across countries. Typically ratings are more responsive to the former and less sensitive to the latter for “new” EU countries compared with “old” EU countries.     

Is there a “real divergence” in the European Union? A comment

In a recently published paper, Hein and Truger [Hein, E., Truger, A., 2005. European monetary union: nominal convergence, real divergence and slow growth? Structural Change and Economic Dynamics 16, 7–33], state that real per capita income in the European Union has developed a long-run process of divergence (real divergence). We discuss their approach towards measuring cross-national income inequality and its evolution over time, and argue that there are good reasons to pursue alternative procedures. We show that alternative measures yield different conclusions concerning the convergence/divergence of prosperity across the EU. Especially, as the divergence result is driven by one or two countries with almost negligible population shares, accounting for population size implies that cross-national income dispersion in the EU has decreased at least since the mid-1990s.     

Opening the box: Comparing EU and US scientific output by scientific field

Recent reports suggest that, during the 1990s, the EU15 overcame the US in scientific output. This paper provides a comprehensive comparative analysis of the evolution of the EU15 and US scientific output and impact throughout the 1990s, looking at publications and impact trends by scientific field. Results show that changes in scientific production for the two blocks are driven by particular scientific fields which grew or declined at a fast rate during the decade. Throughout this period, the EU15 had eight fields of science, corresponding to a 13% of the total papers published, growing at a rate faster than 10% in relation to world average, while the US had only four fast growing fields, representing 6% of its total output. The situation was exactly reversed for the decline, with the US having more than doubled the number of scientific fields when compared to the EU15 declining at a rate faster than 10%. Despite this recent trend, the US maintains a distant leadership in impact across all scientific fields. A detailed analysis of the EU15 countries shows some convergence in terms of outputs and impact, but considerable differences among countries remain. These reflect the evolution, not only of their science, technology and higher education systems, but also their integration in the international science system.     

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.     

Inspiration vs. perspiration in economic development of the Former Soviet Union and China (ca. 1920–2010)

Here, we discuss the role of both perspiration factors (physical and human capital) and inspiration factors (Total Factor Productivity) in the economic development of the Former Soviet Union area (FSU) and China, ca. 1920–2010. Using a newly created dataset, we find that during the Socialist central‐planning period, economic growth in both countries was largely driven by physical capital accumulation. This finding follows logically from the development policies in place at that time. During their transition periods, (i.e., starting from the late 1970s in China and the late 1980s in the FSU), China managed to keep technical inefficiency of production factors in check, largely by massively increasing its human capital, thereby lowering the physical‐to‐human capital ratio. In contrast, the FSU accomplished a similar outcome largely through reducing its stock of physical capital. As a result, although there was little difference in technical efficiency between these two economies, China's emphasis on human capital formation made it easier for this country to improve its general productivity and to increase per capita growth. This changed in the late 1990s and early 2000s, when the FSU began to recover economically, regaining its 1990 levels of output and productivity.     

Which commercial partners are important for the most recently admitted EU countries?

This paper describes the degree of trade integration inside the European Union (EU) after the fifth enlargement in 2004. To achieve this goal, we build a database of information on trade flows between the new EU countries (EU‐10) and 180 commercial partners in six different sectors from 1999 to 2011. Using the standard gravity model and estimating a difference‐in‐differences specification, we analyze how joining the EU affected the intensity and direction of the EU‐10's trade flows. Our results show that though trade exchanges between the EU‐10 and EU‐15 intensified after 2004, the impact of integration was much more significant to the EU‐10 group.