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EU Accession and Income Growth: An Empirical Approach

Abstract

The dynamic effects from EU membership are crucial for the new member states to catch up with the average income level in the old member states. To gauge the dynamic effects we follow a two-step procedure in which a gravity equation for bilateral trade shows the trade effect of EU membership and a growth regression yields the income effect of trade. Shared EU membership is found to increase trade between two of its member states with about 27%. EU membership may contribute to trade by inducing countries to improve the quality of their institutions. Trade increases by another 23% if institutions improve, yielding a total trade increase of 50%. Improved openness increases income by 38% according to our estimates. Adding a small direct effect of improved institutions on income, the total income effect of EU membership is 40% for the 12 new members and Turkey. This implies that EU membership, or its effect on trade and institutions, could lead to large economic gains for the new member states, but does not bring them economically on par with the old member states.

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Notes

  1. 1.

    Exports are expressed as a share of GDP in the origin country. One could thus transfer log GDP in the origin country from the left to the right handside of Eq. 1. Then the values of coefficients for both GDP’s are nearly identical.

  2. 2.

    Baldwin et al. (1997) as well as Brenton and Gros (1997) find an increase in bilateral trade between EU members of about 30%. Later studies find larger effects. Fidrmuc and Fidrmuc (2003) report a 40% increase in bilateral trade, and Lejour et al. (2004) a 50% increase.

  3. 3.

    Since membership of the APEC and the OECD overlaps considerably, the two dummies are introduced separately into the equation.

  4. 4.

    Good surveys are Dollar (1992), Edwards (1993) and Srinivasan and Wallack (2004).

  5. 5.

    For an average value for openness of 69.1%.

  6. 6.

    As a measure of institutional quality we use the Heritage total score which comprises a number of indicators of institutional climate for the period 1995–2003. For our purposes we average the data over the available time span; in other words we assume that institutions will not change over time. The index takes values from one to five, with higher marks indicating worse institutions.

  7. 7.

    The coefficients for the high income countries are generally lower than for other country groups (with an exception of lower-middle income countries.

  8. 8.

    These results are available upon request by the authors.

  9. 9.

    There is one caveat in these calculations. The GDP increase is based on GDP level measured in constant prices. The comparison of income per capita in PPP terms measures GDP in ppp prices. Probably prices will converge somewhat to the average EU price level if GDP increases. This will reduce the relative increase in income per capita somewhat.

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Correspondence to Arjan M. Lejour.

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Lejour, A.M., Solanic, V. & Tang, P.J.G. EU Accession and Income Growth: An Empirical Approach. Transit Stud Rev 16, 127–144 (2009). https://doi.org/10.1007/s11300-009-0045-6

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Keywords

  • Income and openness
  • EU accession
  • Gravity equation
  • Bilateral trade

JEL Classification

  • F15
  • F43