OUTPUT CONVERGENCE IN OUTPUT CONVERGENCE IN EU AND ACCESSION EU AND ACCESSION

COUNTRIESCOUNTRIES

Author: MSc Catalina ConstantinescuAuthor: MSc Catalina Constantinescu

Supervisor: Moisa AltarSupervisor: Moisa Altar

ACADEMY OF ECONOMIC STUDIESDOCTORAL SCHOOL OF FINANCE AND BANKING

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 outputCountries i and j converge if the long-term forecast of output for both

countries are equal at fixed time t:

0)|( ,,lim

tktjktik

IyyE

Definition 2. Common trends in outputCountries i and j contain a common trend if the long-term forecast of

output are proportional at a fixed time t:

0)|( ,,lim

tktjktik

IyyE

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)

tttjti yy ,, ),0( 2 Nt

11 ttt ),0( tt N

12

ttknown0

(1)

(2)

(3)

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

7.90

8.40

8.90

9.40

9.90

10.40

Denmark France GermanyItaly Netherlands United KingdomBelgium Spain PortugalGreece

Empirical results

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

Verspagen test

Country Ψ Adjusted R squared

Denmark 0.983914 0.752599

Netherlands 0.888714 0.861127

Germany 0.96035 0.491654

France 0.930739 0.764081

United Kingdom 0.9782 0.542527

Italy 0.92659 0.908997

CountryCountry ΨΨ Adjusted R squaredAdjusted R squared

SpainSpain 0.9829110.982911 0.8031160.803116

PortugalPortugal 0.9223730.922373 0.9650010.965001

GreeceGreece 0.9508010.950801 0.9499050.949905

Convergence test results Belgium Netherlands Germany FranceUnited

Kingdom Italy

Denmark

ADF 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

Belgium

ADF   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

Netherlands

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

Germany

ADF       I(0) I(1) I(0)

Cointegration [1,-1]       0.0011 0.002 0.308

Kalman filter       -6.502 4.208 -4.946

France

ADF         I(0) I(0)

Cointegration [1,-1]         0.00 0.921

Kalman filter         -0.117 -6.527

United Kingdom

ADF           I(1)

Cointegration [1,-1]           0.027

Kalman filter           -3.845

Convergence test results Portugal Greece Germany France Italy

Spain

ADF I(0) 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

Portugal

ADF   I(0) I(1) I(0) I(1)

Cointegration [1,-1]   0.004

Noncointegrated 0.907

Noncointegrated

Kalman filter   -3.57 -0.652 -0.018 0.0361

Greece

ADF     I(1) I(1) I(1)

Cointegration [1,-1]     0.034 0.717 0.044

Kalman filter     -1.619 -2.579 -2.429

Log GDP per capita for accession countries

7

7.5

8

8.5

9

9.5

10

Cyprus Estonia HungaryLatvia Lithuania MaltaPoland Slovak Republic BulgariaRomania

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

Verspagen tests

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

Lithuania 1.07464 0.725657

CountryCountry ΨΨ Adjusted R squaredAdjusted R squared

CyprusCyprus 1.0311781.031178 0.2134040.213404

MaltaMalta 1.0618961.061896 0.5053550.505355

HungaryHungary 1.0235281.023528 0.1315050.131505

LatviaLatvia 0.9970750.997075 0.2912330.291233

EstoniaEstonia 0.886920.88692 0.4278530.427853

SlovakSlovak 0.9788990.978899 0.4036250.403625

PolandPoland 0.8454810.845481 0.8697230.869723

LithuaniaLithuania 1.0377161.037716 0.638050.63805

RomaniaRomania 1.0590691.059069 0.6206720.620672

BulgariaBulgaria 1.044251.04425 0.7636620.763662

Convergence test results Malta Hungary Latvia Slovak R. Estonia Spain

Cyprus

ADF I(1) I(1) I(1) I(1) I(1) I(0)

Cointegration [1,-1] 0.000

Non cointegrated

Noncointegrated 0.017 0.518 0.118

Kalman filter 0.268 -2.457 1.891 -2.198 -3.523 -3.628

Malta

ADF   I(0) I(1) I(1) I(1) I(0)

Cointegration [1,-1]   0.000

Noncointegrated

Noncointegrated 0.000 0.000

Kalman filter   -1.78 0.557 -0.3 -2.64 -3.41

Hungary

ADF     I(1) I(0) I(1) I(1)

Cointegration [1,-1]    

Noncointegrated 0.241

Noncointegrated 0.924

Kalman filter     0.671 0.367 -0.022 -1.501

Latvia

ADF       I(1) I(1) I(1)

Cointegration [1,-1]      

Noncointegrated

Noncointegrated

Noncointegrated

Kalman filter       -0.391 -4.95 0.731

Slovak Republik

ADF         I(1)  

Cointegration [1,-1]         0.030  

Kalman filter         -0.276  

Convergence test results Romania Bulgaria

Cyprus

ADF I(1) I(1)

Cointegration [1,-1] 0.000 0.003

Kalman filter 0.345 0.4

Malta

ADF I(1) I(1)

Cointegration [1,-1] 0.000 0.000

Kalman filter 0.522 0.522

Hungary

ADF I(0) I(1)

Cointegration [1,-1] 0.000 Non-cointegrated

Kalman filter 1.072 ---

Latvia

ADF I(0) I(1)

Cointegration [1,-1] Non-cointegrated 0.002

Kalman filter --- 0.581

Romania

ADF   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

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