Economic Convergence in the European Union Presented by: Viorica Revenco Revi Panidha Eda Dokle.
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Transcript of Economic Convergence in the European Union Presented by: Viorica Revenco Revi Panidha Eda Dokle.
Economic Convergence in the European UnionPresented by:
Viorica Revenco
Revi Panidha
Eda Dokle
The Theoretical Economic Background of Convergence
• What economic variable has the major role in convergence?
• The Solow Model – theoretical framework of convergence
• Economic convergence within EU – empirical evidence
Growth Rate (i)
• The causes of economic growth has occupied some of the best minds in the world of economics and commerce.
• Robert Lucas and Growth Theory Nobel Prize winner remarked that once you start thinking about economic growth, it is hard to think of anything else.
Growth Rate (ii)• Even a small change in a country’s
growth rate can make an enormous difference in terms of living standards.
Total Output & Sources of Growth
• The output equation
Y = AF (K, L)
Y – total output; K – the economy’s use of capital; L – the economy’s use of labor; A – productivity.
• The growth accounting equation
∆Y/Y = ∆A/A + aK ∆K/K + aL∆L /L
∆Y/Y – rate of output growth; ∆A/A – rate of productivity growth; ∆L /L – rate of labor growth; ∆K/K—rate of capital growth aK – elasticity of output with respect to capital; aL – elasticity of output with respect to labor.
Sources of Growth
• Productivity growth – the source of long-term growth (FDI, win-win situation)
• Knowledge – replicable at a low cost, in contrast to capital and labor
• Labor and capital are scarce and have an inherent Diminishing Marginal Returns feature that makes them a source of medium-term growth.
The Solow Model (i)
• A famous model of economic growth developed by the Nobel laureate Robert Solow in the late 1950’s
• It attempts to address 3 major issues1.Relationship between a nation’s growth
and fundamental factors such as population growth rate, saving rate and rate of technical progress
2.Evolution of nation’s rate of economic growth
3.The convergence phenomenon
The Solow Model (ii)
k- Capital per worker
y- Output per worker
Solow Model - Conclusions • It supports the fact that in a group of
countries with similar characteristics, the relatively poorer ones tend to grow faster than the relatively richer ones – convergence phenomenon
• In support to this idea economic development of specific EU members is further analyzed
Core-Periphery Model• Mega Core Countries
France, Germany, Benelux, Austria, Finland, Sweden, UK and Northern Italy
Capital Intensive
• Periphery Countries
Ireland, Greece, Spain, Portugal and Southern Italy
Labor Intensive
Ireland Before 1973 EC Accession
• Economy strictly oriented and depended on British ties – 55% of exports to UK
• Agricultural Output – one quarter of GDP
Ireland – Economy in the EU Integration Context
• Increased Trade and Decreased Dependence on UK
• FDI
• Funding via EC (EU) budget
Ireland – Increased Trade and Decreased Dependence
on UK
• Exports to UK decreased to 18% in the first years following the accession
• Exports to EU countries (excluding UK) increased to 43% in 2003
• Trade Deficit of €340 mil in 1973
• Trade Surplus of €34.7 bil in 2003
Ireland - FDI• Low Corporate Taxation of 10% =>
Increase in FDI
•
Ireland – GDP per Capita increase as % of EU Average
Ireland – GDP per Capita Convergence to EU-15
Average
Greece – Peculiar Case• EC membership in
1981
• Convergence Process starts in the mid 1990’s
Greece – Economic Development
• Greek Economic Miracle (1949-1975) – highest rates of growth in the world of 10% (following Japan ones)
• Late 1970’s, 1980’s and mid 1990’s – decline in the rate of growth to 1.2%
• 1996 – beginning of actual convergence
Greece – Real GDP Growth Rate since 1996
Greece – Growth Peculiarity• Low levels of FDI – major capital controls
• Community Support Framework (CSF) Program =>
CSF II (1994-1999) – EU transfers of 3.5-4% of annual GDP => 1-2% contribution to the rate of growth
CSF III (2000-2006) – EU transfers of 3% of annual GDP => 0.7-1.2% contribution to the rate of growth
CSF IV (2007-2013) – EU transfers of €20 bil => projected contribution of 0.6-0.8% to the rate of growth
Greece – GDP per Capita (PPP-Dollar)
Greece – GDP per Capita Growth Rate
Greece –GDP per Capita Convergence towards EU-6
Germany – Slowdown in Pace of Growth
• GDP growth rates:
1950’s – 8.2%
1960’s – 4.4%
1970’s – 2.8%
1980 – 2%
1991 (Unified Germany) – 1.3%
Germany – Decrease in FDI
Germany - Real GDP per Capita Convergence towards
EU Average
Convergence – Reality, but not a Pledge
• Core periphery countries – upward tendency of GDP per capita to the EU average
• Mega core countries – downward tendency of GDP per capita towards the EU average
• Conditional upon the creation of a benefic economic environment – undertaking of effective macroeconomic and structural policies (Greece peculiarity)
Thank you!
Questions & Comments