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ACADEMY OF ECONOMIC STUDIES
DOCTORAL SCHOOL OF FINANCE AND BANKING
OUTPUT CONVERGENCE IN
EU AND ACCESSION
COUNTRIES
Author: MSc Catalina Constantinescu
Supervisor: Moisa Altar
Convergence aspects in European Union
•
Nominal convergence – Maastricht Convergence Criteria (for
EMU)
• Real convergence – restructuring the old economic system
– catching up with the productivity and per
capita income levels of mature market economies
Literature review
Convergence: Countries with high output per capita must grow less then
countries with low output per capita.
• Romer (1986), Lucas (1998) - predictions of dynamic equilibrium models for
long-term behavior
• Baumol (1986), Barro (1991), Barro and Sala-i-Martin (1991, 1992, 1995),
Mankiw, Romer and Weil (1992) – negative cross-section correlation between
initial income and growth rates → convergence
Problems for cross-section methodology:
- using production function with diminishing marginal product of capital
- null hypothesis: no countries are converging
• Bernard and Durlauf (1991, 1995), Quah (1996), De la Fuente (2000),
St.Aubyn (1999), Lim and McAleer (2000), Estrin and Urga (1997) – time
series methods for testing convergence
Definitions for convergence in time series
framework
Bernard and Durlauf (1991)
Condition: Output series contain stochastic trend
Definition 1. Convergence in output
Countries i and j converge if the long-term forecast of output for both
countries are equal at fixed time t:
lim E ( y
k 
i ,t  k
 y j ,t  k | I t )  0
Definition 2. Common trends in output
Countries i and j contain a common trend if the long-term forecast of
output are proportional at a fixed time t:
lim E ( y
k 
i ,t  k
 y j ,t k | I t )  0
Implications :
• Convergence for a group of countries → identical long-run
trends, either stochastic or deterministic.
• Common trends → proportionality of the stochastic elements.
• Zero mean stationary processes.
Econometric methodology
• Verspagen (1994)
Wi,t = yi,t – y*t
where: yi,t log real GDP per capita for country i at time t
y*t average log real GDP per capita for the countries in the
sample
W changes according to the following process:
Wi,t+1 = Ψ*Wi,t
Ψ > 1→ per capita income in country i diverges from the
sample group;
Ψ < 1→ convergence of income takes place.
Convergence tests for pairs of countries
“Achieved convergence”
• The Augmented Dickey-Fuller test
Variables: differences between logarithm of GDP
per capita series of two countries
• Cointegration test (Johansen methodology)
Variables: logarithm of GDP per capita series for two
countries
- [1,-1] cointegrating vector → convergence
- [1,-α] cointegrating vector → common trend
“Ongoing convergence”
• Kalman filter method (St. Aubyn 1999)
yi ,t  y j ,t   t   t
(1)
(2)
(3)
 t  N (0, 2 )
 t 1   t  t 1
t  N (0, t )
t   t 1
0  known
2
H0: Φ=1 against H1: Φ<1
 1

se ( )
Empirical Analysis
Data
- Annual GDP per capita in PPP (USD) - World Bank Data Base
- Countries from EU: Denmark, Belgium, Netherlands, Germany, France,
United Kingdom and Italy (1975-2000).
- EU periphery countries: Spain, Portugal and Greece (1975-2000).
- 10 accession countries: - Cyprus, Malta, Hungary, Latvia (1975-2000)
- Slovak Republic (1984-2000)
- Estonia (1987-2000 )
- Poland and Lithuania (1990-2000)
- 2 more accession countries: Romania and Bulgaria (1980-2000)
Log GDP per capita for countries from European Union
10.40
9.90
9.40
8.90
8.40
Denmark
Italy
Belgium
Greece
Germany
United Kingdom
Portugal
00
99
20
19
98
19
97
96
19
19
95
94
19
19
93
19
92
91
19
19
90
89
France
Netherlands
Spain
19
19
88
19
87
86
19
19
85
84
19
19
83
19
82
81
19
19
80
79
19
19
78
19
77
76
19
19
19
75
7.90
Empirical results
Verspagen test
Country
Ψ
Adjusted R squared
Denmark
0.98032
0.756885
Belgium
0.998976
0.109907
Netherlands
0.913831
0.858455
Germany
0.884592
0.502831
France
1.016855
0.773264
United Kingdom
0.981433
0.497414
Italy
0.943208
0.920861
Country
Ψ
Adjusted R squared
Denmark
0.983914
0.752599
Netherlands
0.888714
0.861127
0.96035
0.491654
0.930739
0.764081
0.9782
0.542527
0.92659
0.908997
Germany
France
United Kingdom
Italy
Country
Spain
Ψ
Adjusted R squared
0.982911
0.803116
Portugal
Greece
0.922373
0.950801
0.965001
0.949905
Belgium
Netherlands
Germany
France
United
Kingdom
I(1)
I(1)
I(0)
I(1)
I(1)
I(1)
Cointegration [1,-1]
0.847
0.027
0.945
0.036
0.304
0.313
Kalman filter
-3.023
-0.353
-2.483
-0.132
-0.892
-3.023
I(1)
I(0)
I(1)
I(1)
I(1)
Cointegration [1,-1]
0.218
0.12
0.179
0.001
0.003
Kalman filter
-0.368
-2.487
-1.946
-2.82
0.007
ADF
I(0)
I(1)
I(1)
I(0)
Cointegration [1,-1]
0..00
0.00
0.00
0.00
Kalman filter
-0.431
-2.937
-1.907
-2.363
I(0)
I(1)
I(0)
Cointegration [1,-1]
0.0011
0.002
0.308
Kalman filter
-6.502
4.208
-4.946
ADF
I(0)
I(0)
Cointegration [1,-1]
0.00
0.921
-0.117
-6.527
Convergence test results
ADF
Denmark
ADF
Belgium
Netherlands
ADF
Germany
France
Kalman filter
ADF
United
Kingdom
Italy
I(1)
Cointegration [1,-1]
0.027
Kalman filter
-3.845
Convergence test
results
ADF
Spain
France
Italy
I(1)
I(1)
I(1)
I(1)
Cointegration
[1,-1]
0.924
0.000
0.000
0.000
0.000
Kalman filter
-3.117
-5.708
-2.001
-0.248
-2.033
I(0)
I(1)
I(0)
I(1)
Cointegration
[1,-1]
0.004
Non
cointegrated
0.907
Non
cointegrated
Kalman filter
-3.57
-0.652
-0.018
0.0361
I(1)
I(1)
I(1)
Cointegration
[1,-1]
0.034
0.717
0.044
Kalman filter
-1.619
-2.579
-2.429
ADF
Greece
Germany
I(0)
ADF
Portugal
Portugal Greece
Log GDP per capita for accession countries
10
9.5
9
8.5
8
7.5
Cyprus
Latvia
Poland
Romania
Estonia
Lithuania
Slovak Republic
Hungary
Malta
Bulgaria
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
7
Verspagen tests
Country
Ψ
Adjusted R squared
Cyprus
1.031324
0.941309
Malta
0.965348
0.952942
Hungary
0.860037
0.929309
Latvia
1.035503
0.924918
Country
Ψ
Adjusted R squared
Cyprus
1.031915
0.802815
Malta
1.015785
0.871978
Hungary
0.570556
0.191988
Latvia
1.036693
0.81199
Estonia
1.004835
0.687855
Slovak
0.928012
0.209155
Country
Ψ
Adjusted R squared
Cyprus
1.026108
0.130426
Malta
1.049914
0.368951
Hungary
0.970821
-0.09418
Latvia
1.026997
0.338245
Estonia
0.968953
0.200447
Slovak
0.636324
0.078729
Poland
0.901208
0.780803
1.07464
0.725657
Lithuania
Country
Ψ
Adjusted R squared
Cyprus
1.031178
0.213404
Malta
1.061896
0.505355
Hungary
1.023528
0.131505
Latvia
0.997075
0.291233
Estonia
0.88692
0.427853
Slovak
0.978899
0.403625
Poland
0.845481
0.869723
Lithuania
1.037716
0.63805
Romania
1.059069
0.620672
Bulgaria
1.04425
0.763662
Convergence test
results
Malta
Hungary
Latvia
Slovak R.
Estonia
Spain
I(1)
I(1)
I(1)
I(1)
I(1)
I(0)
Cointegration
[1,-1]
0.000
Non
cointegrated
Non
cointegrated
0.017
0.518
0.118
Kalman filter
0.268
-2.457
1.891
-2.198
-3.523
-3.628
I(0)
I(1)
I(1)
I(1)
I(0)
Cointegration
[1,-1]
0.000
Non
cointegrated
Non
cointegrated
0.000
0.000
Kalman filter
-1.78
0.557
-0.3
-2.64
-3.41
I(1)
I(0)
I(1)
I(1)
0.924
ADF
Cyprus
ADF
Malta
ADF
Hungary
Cointegration
[1,-1]
Non
cointegrated
0.241
Non
cointegrated
Kalman filter
0.671
0.367
-0.022
-1.501
I(1)
I(1)
I(1)
Cointegration
[1,-1]
Non
cointegrated
Non
cointegrated
Non
cointegrated
Kalman filter
-0.391
-4.95
0.731
ADF
Latvia
ADF
Slovak
Rep
ublik
I(1)
Cointegration
[1,-1]
0.030
Kalman filter
-0.276
Convergence test results
Romania
Bulgaria
ADF
I(1)
I(1)
Cointegration [1,-1]
0.000
0.003
Kalman filter
0.345
0.4
I(1)
I(1)
Cointegration [1,-1]
0.000
0.000
Kalman filter
0.522
0.522
I(0)
I(1)
Cointegration [1,-1]
0.000
Non-cointegrated
Kalman filter
1.072
---
I(0)
I(1)
Non-cointegrated
0.002
---
0.581
Cyprus
ADF
Malta
ADF
Hungary
ADF
Latvia
Cointegration [1,-1]
Kalman filter
ADF
Romania
I(0)
Cointegration [1,-1]
0.000
Kalman filter
0.211
Conclusions
• Some evidence of convergence for European Union countries
• All EU countries have common trends
• EU periphery countries form an ongoing convergent group
• Accession countries form a heterogeneous group of
economies
• Counteracts for inadequate real convergence:
- wage flexibility in the accession countries, migration to
the EU core countries and large fiscal transfers from the
EU to the new Member States.
- structural issues for the new members
References
• Barro, R.J. (1991), “Economic Growth in a Cross-Section of Countries”, Quarterly Journal of
Economics, 106.
• Barro, R.J. and Sala-i-Martin (1991a), “Convergence Across States and Regions”, Brookings
Papers on Economic Activity, 1.
• (1992b), “Convergence”, Journal of Political Economy, 100.
• (1995c), “Economic Growth”, McGraw-Hill, New-York.
• Baumol, W.J. (1986), “Productivity Growth, Convergence and Welfare: What the Long Run
Data Show”, American Economic Review, 76.
• Bergs, Rolf (2001) “EU Regional and Cohesion Policy and Economic Integration of the
Accession Countries”, Policy Research & Consultancy (Germany), Discussion Papers.
• Bernard, A.B. and S.N. Durlauf (1991a), “Convergence of International Output Movements”,
NBER W.P.3717.
• (1995b), “Convergence in International Output”, Journal of Applied Econometrics, 10.
• (1996c), “Interpreting Tests of the Convergence Hypothesis”, Journal of Econometrics,71
• Van Eden, Holger, Albert de Groot, Elisabeth Ledrut, Gerbert Romijn and Lucio Vinhas de
Souza (1999) “EMU and Enlargement: A Review of Policy Issues”, European Parliament
Economic Affairs Series ECON 117 EN 12/99).
• Enders, Walter (1995), “Applied Econometric Time Series”, John Wiley & Sons, Inc.
• Estrin, Saul and Giovanni Urga (1997), “Convergence in Output in Transitions Economies
Central and Eastern Europe 1970-1995”, The Williamson Davidson Institute WP30.
• De la Fuente, Angel (2000), “Convergence Across Countries and Regions: Theory and
Empirics”, Instituto de Analisis Economico WP 44700.
• Hamilton, James D. (1994), “Time Series Analysis”, Princeton University Press.
• Lim, Lee Kian and Michael McAleer (2000), “Convergence and Catching Up in South East
Asia: A Comparative Analysis”, University of Western Australia, Department of Economics.
• Lucas, R.J. (1988), “On the Mechanism of Economic Development”, Journal of Monetary
Economics, 22.
• Mankiw, N.G., D. Romer and D. Weil (1992), “A Contribution to the Empirics of Economic
Growth”, Quarterly Journal of Economics, V 107.
• Quah, D.T. (1996), “Empirics for Economic Growth and Convergence”, European Economic
Review.
• Romer, P.M. (1986), “Increasing Returns and Long-Run Growth”, Journal of Political
Economy, 94.
• St. Aubyn, M (1999), “Convergence Across Industrialized Countries (1890-1989). New Results
using Time Series Methods”, Empirical Economics, 24.
• World Bank “2002 World Development Indicators” Data-Base .