The Economics of European Integration

Transcription

1 The Economics of European Integration

2 Chapter 7 Growth Effects & Factor Market Integration

3 Growth Effects European leaders have long emphasised 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, Hence the name accumulation effects.

4 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.) and knowledge capital (technology). ERGO, rate of output growth is 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.

5 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 fade out. Growth returns to its long-run rate. Long run effects raise long-run rate forever.

6 Some facts Table 7-1: European Growth Phases, Period Real GDP Real GDP per capita Real GDP per hour Belle epoque nd 30 yr war Golden era Prod ity slowdown Whole Period

7 Some facts Growth in the WWII Reconstruction Phase. Austria Belgium Denmark Finland France Germany Italy Netherlands Norway Sweden Switzerland UK The Set-Back: (Prewar year when GDP equalled that of 1945) Back-on-Track Year (Year GDP attained highest pre-war level) % 6.0% 13.5% n.a. 19.0% 13.5% 11.2% 39.8% 9.7% These nations grew during WWII Reconstruction Growth (rate 1945 to col. 2 year)

8 Some facts GDP per capita & Rankings, 1950 and 1973 (1990 international dollars) GDP (1990 $) European Rank 1950 Change in Rank GDP Growth Rate EEC average 4, EFTA average 6, France 5, Germany 4, Italy 3, UK 6,

9 Complete table 1950 GDP (1990 $) EEC average 4,825 Some facts European Rank 1950 Change in Rank GDP Growth Rate 4.2 Netherlands 5, Belgium 5, France 5, Germany 4, Italy 3, EFTA average 6, Switzerland 8, UK 6, Sweden 6, Denmark 6, Norway 4, Finland 4, Austria 3, Others average 2, Ireland 3, Spain 2, Portugal 2, Greece 1, For Comparison USA 9, Japan 1,

10 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.

11 Solow diagram euros/l Y/L* Outflow of capital per L, constant depreciation rate, delta B The inflow of new capital and how it varies with K/L δ(k/l) GDP/L I o D o A s(gdp/l) Assume fixed investment rate, s K/L o K/L* K/L

12 Induced capital formation euros/l Y/L Y/L c Y/L* Induced capital formation effect, i.e. medium-run growth bonus Allocation effect C B A E D GDP/L GDP/L δ(k/l) s(gdp/l) s(gdp/l) K/L* K/L K/L

13 euros/l Y/L Y/L* Integration induced investment rate rise Medium-run growth bonus D B C A GDP/L δ(k/l) s (GDP/L) s(gdp/l) K/L* K/L K/L

14 Other MR growth effects: investment rate. Experience of Spain & Portugal

15 Other MR growth effects: investment rate. Experience of Ireland

16 Other MR growth effects: investment rate. Experience of Greece

17 Long-term growth in Solow-like diagram euros/l GDP/L Y/L* s(gdp/l) A δ(k/l) B K/L* K/L =Knowledge/L

18 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 Y/L* s (GDP/L) C A s(gdp/l) δ(k/l) B K/L* K/L =Knowledge/L