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EU MEMBERSHIP, fast lane to prosperity?

Jacques Pelkmans

College of Europe, Bruges&

WRR, The Hague

Special Lecture series, European Institute of Romania, Bucharest25 September 2003

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USING MEMBERSHIP FOR CATCH-UP GROWTH

Shifting pre-occupations

security architecture of Europe

transition

‘rooting’ democracy

Europe agreement

macro-economic stability

pre-accession & acquis

Now EU membership; What for?Given all the above, EU accession is about prosperity.Hence, a very long-run catch-up growth strategy.

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GDP in Central European transition economies, 1989-1999(Indices, 1989 = 100)

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Sigma convergence in the ECE transition economies and the EU 1989-2000

(standard deviation of the logarithms of per capita GDP)

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DID MEMBERSHIP SERVE GROWTH IN THE PAST?

• growth bias in the Rome treaty

• EEC-6 - the golden growth era

- statics and dynamics

• Britain • Spain

• Ireland • Portugal

• Greece • East Germany

BUT… what about regions?• convergence and divergence• transfers: not a sufficient condition for catch-up growth; and

necessary? , well…..

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The impact of wider EC/EU membership on sigma convergence 1950-1998

(natural logarithms)

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UNION’S DISREGARD OF GROWTH

• growth paradise lost? stagflation early 1980s single market and the euro – impressive responses Europe’s growth is dying, however the new response (Lisbon) is not nearly as serious as ‘1992’ and

the euro a European Japan? the Central European interest

• enlargement doctrine acquis as “club rule” acquis in the candidates’ best interests trade-offs between acquis & growth.

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EMPIRICAL POST-SOLOW SCHOOL

– Solow (neo-classical) growth theory is very long-run– ‘augmented’ by ‘endogeneous growth theory’– empirics (Barro; Levine-Renelt) use very rough variables

• initial income• enrollment (human capital)• government consumption (Barro)• population growth [L-R]• investment rate [L-R]

– this leads to great growth potential over the very long run– dubious → Campos– redone better → Fidrmuc (2001)

→ with estimated coefficient of CEEs, and a LIB index→ Romania 3.32 % - 4.87 % (over decades)[based on estimates over ’95-’00, so bad for Romania!]

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GROWTH PREREQUISITES AND EU MEMBERSHIP (I)

political stability and democracy in the competition for FDI distinguish

• sunk-cost FDI vs. footloose• new FDI and ‘locked-in’ FDI

more generally, the costs of instability can be very high [stability fosters solid institutions and trust; interruptions; etc..] and last long

Copenhagen (political) criteria help virtuous interaction with ‘chasing prosperity’.

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GROWTH PREREQUISITES AND EU MEMBERSHIP (II)

macroeconomic stability and credibility Romania’s fiscal test is quite good with queries about the shares of ‘social’ transfers and the pension

system over the long run debt is low and hence interest burden inflation should go down to, say, 5 %- 7 % (if growth remains high)

[Balassa-S-effect of +- 3 %?)

large current account deficits CAN be good, offsetting capital flows (FDI/portfolio)

EU’s “stability culture” will demand credibility, which is ultimately good for growth

BOTTOM LINE: credibility matters, not overly rigid (EU?) rules.

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GROWTH FUNDAMENTALS AND EU MEMBERSHIP (I)

FACTOR ACCUMULATION• LABOUR

Little for Romania;- higher participation (see Lisbon), no- high fertility rate, no?

• CAPITAL- INV.ratio expected to go up [PEP 2001- 19 %; 2005- 21.8 %]- savings gap filled by FDI?- savings gap filled by EU transfers?

Prerequisites: quality of financial marketsquality of financial supervisorsinvestment climate (strategic) selective.

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GROWTH FUNDAMENTALS AND EU MEMBERSHIP (II)

• existing technology- many sources

- best facilitation via own technology base

- TBT-acquis plus MR impose minimum infrastructure

- deep interaction with FDI and local suppliers

- restore technical human capital

[incentives for dynamic comparative advantage ladder].

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SECULAR TECHNICAL PROGRESS

avoid the Habibi- syndrome

link centers-of-excellence to FDI and EU framework programmes[initially, test quality internationally; fund only the

competitive centres]

restore incentives for quality science in Romania, and dare to assume a long-run view

promote innovation above invention

credibility of IPR.

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APPROPRIATE ECONOMIC INSTITUTIONS

core issue: as transition has shown EU acquis identifies in detail witness domestic (OECD) economies

economic institutions set ‘framework conditions’ for markets to function well (no m. failures) should deliver credible

• information / transparency• enforcement supervision

legitimize ‘market economy’ as ‘in the public interest’ hence, pro-growth, if done well.

ACQUIS critical: • solves design/core • speed (pre-accession)

• best-practices • discipline & lock-in• huge pre-emption of bad policies.

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MARKET INTEGRATION PROPELS YOUR GROWTH

(manufacturing)

i. output, employment & productivity

ii. structural change in C.Eur. industry

iii. export: structural change, compared to EU South for sectors acc. to factor intensities for sectors acc. to skill intensities

iv. quality, catch-up (price;coverage)

v. quality (unit value), sectors acc. to factor intensities

vi. quality (unit value), sectors acc. to skills

vii. sectoral attraction for FDI

viii. changes of employment (6 CEEs) in skill categories

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Growth rates of employment, output and productivity (1993-2000)

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Shares of different industry groupings in exports to EULabour-intensive industries

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Export price gaps – all manufacturing products traded with the EUCEE – candidate countries

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Product coverage of CEE exports, EU(15) imports is 1

Product coverage EU exports, EU (15) imports is 1

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Unit value ratios by taxonomy II (labour skills)High-skill industries

Low-skill industries

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The share of FIEs in different industry groupings

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Changes of employment in skill categories

Polandindex:

1993=100)

Romaniaindex:

1996=100)

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CATCHING-UP STRATEGY (I)EU ROLE

i. pre-accession- strict, when pro-growth- accommodating, where acquis is a ‘drag-on-growth’

[water/air; nuclear; etc..]

ii. early post-accession- idem

iii. do not export the CAP eastward!• agro-productivity up• labour exit strategy• subsidize reform/infrastructure/food safety

iv. cohesion, target human capital

local infrastructureenvironmentTENs

v. BEPG process, sharper pro-growth• overhaul Luxembourg & Cardiff• tighten Lisbon

vi. adapt entry conditions Euroland.

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CATCHING-UP STRATEGY (II)ROMANIA’S LONG HAUL

i. exploit comparative advantages dynamically• labour-intensive first,• avoid competing China/India in a decade or so• intra-sectoral, skill/quality up• FDI-investment climate

ii. restore/upgrade domestic ‘techno-base’• based on acquis• plus quality assurance, etc…

iii. allow strong services sector to flourishiv. do not passively welcome CAP money

• long-run (reform) strategy first• avoid vested-interest build-up• promote agro-infrastructure/quality• make income payments digressive• anticipate (much) lower trade protection

v. do not ‘converge’ labour market practicesvi. cohesion → see EUvii. do not enter Euroland (too) quickly.