Download Introduction to Management and Organisational Behaviour

The Economics of
European Integration
Chapter 7
Growth Effects
and Factor
Market
Integration
© Baldwin & Wyplosz 2003
Growth Effects
• European leaders have long emphasised a
different the pro-growth aspects of
European integration.
• These operate in a way that is
fundamentally different from the way
allocation effects operate.
• They operate by changing the rate at which
new factors of production – mainly capital –
are accumulated, i.e. the name
‘accumulation effects’.
© Baldwin & Wyplosz 2003
Verbal Logic of Growth
• Growth in income per worker requires
more output per worker.
• Nation’s labour force can produce more
goods and services year after year only if
they have more/better ‘tools’ year after
year:
– ‘tools’ means capital broadly defined:
• physical capital (machines, etc.)
• human capital (skills, training,
experience, etc.)
• knowledge capital (technology).
© Baldwin & Wyplosz 2003
Verbal Logic of Growth
• ERGO, rate of output growth linked to rate
of physical, human and knowledge capital
accumulation.
• Most capital accumulation is intentional
and it is called investment:
– thus: European integration affects
growth mainly via its effect on
investment in human capital, physical
capital and knowledge capital.
© Baldwin & Wyplosz 2003
Verbal Logic of Growth:
Summary
• European integration (or any other policy) →
Allocation effect → Improved efficiency →
Better investment climate → More
investment in machines, skills and/or
technology → Higher output per person.
• Medium run effects eventually peter out
– Growth returns to its long-run rate.
• Long-run effects raise long-run rate forever.
© Baldwin & Wyplosz 2003
Some Facts
European Growth Phases, 1890-1992
© Baldwin & Wyplosz 2003
Some Facts
Growth in the WWII Reconstruction Phase
© Baldwin & Wyplosz 2003
Some Facts
GDP per capita & rankings, 1950 and 1973 (1990 international dollars)
1950 GDP
(1990 $)
European
Rank 1950
Change in
Rank 19501973
GDP Growth
Rate
EEC average
4,825
8.0
+ 1.2
4.2
EFTA average
6,835
3.6
-1.4
3.0
France
5,221
7
+2
4.0
Germany
4,281
9
+5
5.0
Italy
3,425
13
+2
4.9
UK
6,847
2
-5
2.4
© Baldwin & Wyplosz 2003
Some Facts
GDP per capita & rankings, 1950 and 1973 (1990 international dollars) – full list
© Baldwin & Wyplosz 2003
Some Facts
GDP per capita & rankings, 1950 and 1973 (1990 international dollars)
– full list, cont.
© Baldwin & Wyplosz 2003
Solow Diagram
• Show medium run growth effects in simple
diagram.
• To simplify, start with whole EU as a
single, closed economy with fully
integrated capital and labour markets and
the same technology everywhere.
© Baldwin & Wyplosz 2003
Solow Diagram
© Baldwin & Wyplosz 2003
Induced Capital Formation
© Baldwin & Wyplosz 2003
Integration Induced Investment Rate Rise
© Baldwin & Wyplosz 2003
Integration-induced investment in Spain
and Portugal
© Baldwin & Wyplosz 2003
Integration-induced investment in Ireland
© Baldwin & Wyplosz 2003
Integration-induced investment in Greece
© Baldwin & Wyplosz 2003
Long-Term Growth in
Solow-Like Diagram
© Baldwin & Wyplosz 2003
Long-Term Growth Impact of Integration
euros/L
Integration improves efficiency → improves investment climate → higher investment rate (s
rises to s’) → faster growth (knowledge capital accumulates more rapidly)
GDP/L
s’(GDP/L)
Y/L*
s(GDP/L)
C
A
d(K/L)
B
K/L*
K/L =Knowledge/L
© Baldwin & Wyplosz 2003
Microeconomics of Capital Market
Integration
© Baldwin & Wyplosz 2003
Welfare Effects of Capital ‘Migration’
• ‘Native’ capital-owners in home lose area ‘A’; home
labour gains area A+B; Total economic impact on
home citizens equal to area B.
• Foreign capital still employed in foreign gains F;
foreign labour loses D+F; total impact on foreignbased factors is -D:
– if we count the welfare of foreign capital owners
whose capital now works in home (gains C+D), so
overall foreign welfare gain is C.
© Baldwin & Wyplosz 2003
Welfare Effects of Capital ‘Migration’
© Baldwin & Wyplosz 2003
Labour Market Integration: Simplest Framework
• Just like capital migration analysis
© Baldwin & Wyplosz 2003
Immigration: Facts
© Baldwin & Wyplosz 2003
Immigration: Facts (cont.)
© Baldwin & Wyplosz 2003
Unemployment
© Baldwin & Wyplosz 2003