1. Chapter 7: Growth Effects & Factor Market Integration
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2. © Baldwin&Wyplosz The Economics of European Integration
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,
hence the name ‘accumulation effects’.
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3. © Baldwin&Wyplosz The Economics of European Integration
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 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.
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4. 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
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5. © Baldwin&Wyplosz The Economics of European Integration
Some facts
Table 7‑1: European Growth Phases,
Period
Real GDP
Real GDP per capita
Real GDP per hour
2.6
1.7
1.6
1.4
1.0
1.9
4.6
3.8
4.7
2.0
2.7
Whole Period
2.5
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Some facts
Table 7‑2: Growth in the WWII Reconstruction Phase.
The Set-Back: (Pre-war year when GDP equalled that of 1945)
Back-on-Track Year (Year GDP attained highest pre-war level)
Reconstruction Growth (rate 1945 to col. 2 year)
Austria
1886
1951
15.2%
Belgium
1924
1948
6.0%
Denmark
1936
1946
13.5%
Finland
1938
1945
n.a.
France
1891
1949
19.0%
Germany
1908
Italy
1909
1950
11.2%
Netherlands
1912
1947
39.8%
Norway
1937
9.7%
Sweden
These nations grew during WWII
Switzerland UK
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7. © Baldwin&Wyplosz The Economics of European Integration
Some facts
Table 7 3: GDP per capita & Rankings, 1950 and 1973 (1990 international dollars).
1950 GDP (1990 $)
European Rank 1950
Change in Rank
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
4.9 UK
6,847 2 -5
2.4
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8. © Baldwin&Wyplosz The Economics of European Integration
Some facts
Complete table
1950 GDP (1990 $)
European Rank 1950
Change in Rank
GDP Growth Rate
EEC average
4,825
8.0
+ 1.2
4.2
Netherlands
5,850 5 -1
3.4
Belgium
5,346 6 -2
3.5
France
5,221 7
+ 2
4.0
Germany
4,281 9
+ 5
5.0
Italy
3,425 13
4.9
EFTA average
6,835
3.6
-1.4
3.0
Switzerland
8,939 1
3.1 UK
6,847 2 -5
2.4
Sweden
6,738 3
+ 1
Denmark
6,683 4
Norway
4,969 8 -4
3.2
Finland
4,131 10
Austria
3,731 11
Others average
2,401
14.3
-0.3
5.2
Ireland
3,518 12 -3
Spain
2,397 14
5.8
Portugal
2,132 15
5.6
Greece
1,558 16
6.2
For Comparison USA
9,573
Japan
1,873
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9. © Baldwin&Wyplosz The Economics of European Integration
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.
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10. © Baldwin&Wyplosz The Economics of European Integration
Solow diagram A B
K/L
euros/L
GDP/L
s(GDP/L)
d(K/L)
Y/L*
K/L*
K/Lo Io Do
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11. Induced capital formation
Induced capital formation effect, i.e. medium-run growth bonus
euros/L
GDP/L’ E
Y/L’ C
GDP/L
Y/Lc
Allocation effect
Y/L*
d(K/L) B
s(GDP/L)’ D
s(GDP/L) A
K/L*
K/L’
K/L
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12. Integration induced investment rate rise
euros/L
Medium-run growth bonus
GDP/L D
Y/L’
Y/L*
d(K/L) B
s’(GDP/L) C
s(GDP/L) A
K/L*
K/L’
K/L
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13. Experience of Spain & Portugal
Other MR growth effects: investment rate
Martin, please add figure 7-4 (Spain & Portugal
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14. Other MR growth effects: investment rate
Experience of Ireland
Other MR growth effects: investment rate
Martin, please add figure 7-5 (Ireland)
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15. Other MR growth effects: investment rate
Experience of Greece
Other MR growth effects: investment rate
Martin, please add figure 7-6 (Greece)
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16. Long-term growth in Solow-like diagram
euros/L
GDP/L
Y/L*
s(GDP/L) A
d(K/L) B
K/L*
K/L =Knowledge/L
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17. Long-term growth impact of integration
Integration improves efficiency → improves investment climate → higher investment rate (s rises to s’) → faster growth (knowledge capital accumulates more rapidly)
euros/L
GDP/L
s’(GDP/L)
Y/L*
s(GDP/L) C A
d(K/L) B
K/L*
K/L =Knowledge/L
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18. Microeconomics of capital market integration
Long-term growth impact of integration
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19. Welfare effects of capital ‘migration’
Long-term growth impact of integration
‘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 Foreign-based 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.
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20. Labour market integration: some facts
Long-term growth impact of integration
Martin please put figure 7-11 here
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21. Labour market integration: Simplest framework
Long-term growth impact of integration
Just like capital migration analysis
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22. Immigration: Facts, Table 7-4
Long-term growth impact of integration
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23. Long-term growth impact of integration
Unemployment
Long-term growth impact of integration
Real wage
Real wage Sc S Sc S uo uo wo wo u’ w’ D D D’ Lo LI
Employment L’ Lo
Employment
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