Abstract
Improvement of economic policies and institutions and reduced exchange rate volatility are two expected effects arising when candidates develop prerequisites needed to qualify for EU membership. In this paper, we evaluate whether these two effects occurred in the Eastern European accession countries by inspecting exchange rate volatility and the evolution of different indicators of the quality of institutions before and after the start of the negotiation period. We then evaluate the impact of both effects on growth of real per capita GDP. By comparing the effects on accession countries to a group of control countries, including transition non candidates, we find that the prospect of accession has a significant effect on output growth, which starts materializing much before accession and even before the beginning of the negotiations with the EU.
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Notes
The transition candidates are the former communist countries that were included in the first accession group: Czech Republic, Estonia, Latvia, Lithuania, Slovak Rep., Slovenia, Poland, Hungary. Our sample of transition non candidates consists of Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrgystan, Macedonia, Moldova, Romania, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.
More detailed information on the criteria may be obtained at: http://europa.eu.int/comm/enlargement/enlargement.htm.
Since we are interested in the effects of the historically realized volatility on growth and not in the investigation of its law of variation, we prefer this method to ARCH or GARCH measures of volatility.
Exchange rates are official rates with one exception. From the end of 1990 until May 1995 for transition countries trading with Russia (Czech Republic, Estonia, Lithuania and Latvia) the mean monthly weighted exchange rate is calculated with the black market rate instead of the official exchange rate. The black market exchange rate is published by the Italian Exchange Office (http://www.uic.it).
The details of EFW criteria are omitted for reasons of space and available on the website http://www.freetheworld.com.
Data are available for all the accession countries but not for some of the other transition countries. Since data availability is generally positively related with good performance, the differences are likely to be downward biased.
Recall that all the transition countries were under pressure from the international financial institutions to make institutional reforms. Hence, our comparisons measure the effects of the marginal pressure exerted by the enlargement process in addition to that of international financial institutions.
The exogeneity of labour force growth is a restrictive assumption which can be accepted considering that changes in per capita income on fertility affect labour force with lags which go beyond the time interval considered in our estimate (especially panel estimates). Moreover, we may also assume that with migration and, albeit imperfect, international mobility of labour the effect of domestic fertility on the labour force is limited.
Dowrick and Rogers (2002) implicitly share this view by arguing that “the Solow-Swann steady state is a moving target which grows at different rates in each country” and by adding that such growth depends on technical progress, which “may well reflect unobserved policy and institutional differences”.
The coefficients of human and physical capital and the sum of population growth, depreciation and technical progress coincide in level and growth estimates. From (4) and (5) the standard implied restriction of conditional convergence estimates is c 2 + c 3 = −c 4.
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Becchetti, L., Hasan, I. & Wachtel, P. The Anticipated Effects of EU Enlargement: Exchange Rate Volatility, Institutions and Conditional Convergence. Transit Stud Rev 15, 431–446 (2008). https://doi.org/10.1007/s11300-008-0022-5
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DOI: https://doi.org/10.1007/s11300-008-0022-5