for august 2001 european integration and income convergence€¦ · perera, transferring irrigation...

48
WORLD BANK TECHNICaL PAPER NO. 614 Europe and CentralAsia Poverty Reduction annd Economic U Afa | .l1ana,erment Series work in progress WTP514 for public disoussion August 2001 European Integration and Income Convergence Lessons for Central and EasternEuropean Countries Carmela iMIartin Francisco J. Veldzquez Bernard Funck Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Upload: others

Post on 22-May-2020

0 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

WORLD BANK TECHNICaL PAPER NO. 614

Europe and Central Asia Poverty Reduction annd EconomicU Afa | .l1ana,erment Series

work in progress WTP514for public disoussion

August 2001

European Integrationand Income ConvergenceLessons for Central and Eastern European

Countries

Carmela iMIartinFrancisco J. VeldzquezBernard Funck

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Page 2: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Recent World Bank Technical Papers

No. 428 C. Mark Blackden and Chitra Bhanu, Gender, Growth, and Poverty Rediuction: Special Program of Assistancefor Africa, 1998 Statuts Report on Poverty in Suib-Saharan Africa

No. 429 Gary McMahon, Jose Luis Evia, Alberto Pasc6-Font, and Jose Miguel Sanchez, An Environmental Study ofArtisanal, Small, and Medium Mining in Bolivia, Chile, and Peru

No. 430 Maria Dakolias, Couirt Performance arouind the World: A Comparative Perspective

No. 431 Severin Kodderitzsch, Reforms in Albanian Agricuiltutre: Assessing a Sector in Transition

No. 432 Luiz Gabriel Azevedo, Musa Asad, and Larry D. Simpson, Management of Water Resouirces: Bulk WaterPricing in Brazil

No. 433 Malcolm Rowat and Jose Astigarraga, Latin American Insolvency Systems: A Comparative Assessment

No. 434 Csaba Csaki and John Nash, eds., Regional and International Trade Policy: Lessonsfor the EU Accession in theRutral Sector-World Bank/FAO Workshop, Juine 20-23, 1998

No. 435 lain Begg, EU Investment Grants Review

No. 436 Roy Prosterman and Tim Hanstad, ed., Legal Impediments to Effective Rural Land Relations in Eastern Europeand Central Asia: A Comparative Perspective

No. 437 Csaba Csaki, Michel Dabatisse, and Oskar Honisch, Food and Agricultuire in the Czech Repiublic: From a"Velvet" Transition to the Challenges of EU Accession

No. 438 George J. Borjas, Economic Research on the Determinants of Immigration: Lessons for the Eutropean Union

No. 439 Mustapha Nabli, Financial Integration, Vuilnerabilities to Crisis, and EU Accession in Five Central EuropeanCouintries

No. 440 Robert Bruce, loannis Kessides, and Lothar Kneifel, Overcoming Obstacles to Liberalization of the TelecomSector in Estonia, Poland, the Czech Repuiblic, Slovenia, and Hungary: An Overview of Key Policy Concerns andPotential Initiatives to Facilitate the Transition Process

No. 441 Bartlomiej Kaminski, Hungary: Foreign Trade Issues in the Context of Accession to the EU

No. 442 Bartlomiej Kaminski, The Role of Foreign Direct Investment and Trade Policy in Poland's Accession to theEutropean Union

No. 443 Luc Lecuit, John Elder, Christian Hurtado, Francois Rantrua, Kamal Siblini, and Maurizia Tovo,DeMIStifying MIS: Guidelinesfor Management Information Systems in Social Funds

No. 444 Robert F. Townsend, Agriciultuiral Incentives in Suib-Saharan Africa: Policy Challenges

No. 445 lan Hill, Forest Management in Nepal: Economics of Ecology

No. 446 Gordon Hughes and Magda Lovei, Economic Reform and Environmental Performance in Transition Economies

No. 447 R. Maria Saleth and Ariel Dinar, Evaluating Water Instititions and Water Sector Performance

No. 449 Keith Oblitas and J. Raymond Peter in association with Gautam Pingle, Halla M. Qaddumi, and JayanthaPerera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India

No. 450 Andres Rigo Sureda and Waleed Haider Malik, eds., Judicial Challenges in the New Millenniuim: Proceedingsof the Second Suimmit of the Ibero-American Supreme Couirts

No. 451 World Bank, Privatization of the Power and Natiural Gas Indiustries in Hungary and Kazakhstan

No. 452 Lev Freinkman, Daniel Treisman, and Stephen Titov, Suibnational Buidgeting in Ruissia: Preempting aPotential Crisis

No. 453 Bartlomiej Kaminski and Michelle Riboud, Foreign Investment and Restructiuring: The Evidencefromi Hungary

No. 454 Gordon Hughes and Julia Bucknall, Poland: Complying with EU Environmental Legislatire

No. 455 Dale F Gray, Assessrment of Corporate Sector Valiue and Vuilnerability: Links to Exchange Rate and FinancialCrises

No. 456 Salman M.A. Salman, ed., Grouindwater: Legal and Policy Perspectives: Proceedings of a World Bank Seminar

No. 457 Mary Canning, Peter Moock, and Timothy Heleniak, Reforming Ediucation in the Regions of Russia

No. 458 John Gray, Kazakhstan: A Review of Farn Restructiuring

No. 459 Zvi Lerman and Csaba Csaki, Ukraine: Review of Farm Restruictuiring Experiences

No. 460 Gloria La Cava and Rafaella Y. Nanetti, Albania: Filling the Vulnerability Gap

No. 461 Ayse Kudat, Stan Peabody, and Caglar Keyder, eds., Social Assessment and Agricultural Reform in CentralAsia and Tuirkey

No. 462 T. Rand, J. Haukohl, and U. Marxen, Mutnicipal Solid Waste Incineration: Requirementsfor a SuiccessfiJl Project

(List continues on the inside back cover)

Page 3: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

WORLD BANK TECHNICAL PAPER NO. 514

Europe and CentralAsia Poverty Reduction and EconomicManagement Series

European Integration,and Income ConvergenceLessonsfor Central and Eastern European

Countries

Carmela MartinFrancisco J. VeldzquezBernard Funck

The World BankWashington, D.C.

Page 4: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Copyright (D 2001The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing August 20011 2 3 4 04 03 02 01

Technical Papers are published to communicate the results of the Bank's work to the development com-munity with the least possible delay. The typescript of this paper therefore has not been prepared in accor-dance with the procedures appropriate to formal printed texts, and the World Bank accepts noresponsibility for errors. Some sources cited in this paper may be informal documents that are not readilyavailable.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s)and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to mem-bers of its Board of Executive Directors or the countries they represent. The World Bank does not guaran-tee the accuracy of the data included in this publication and accepts no responsibility for any consequenceof their use. The boundaries, colors, denominations, and other information shown on any map in this vol-ume do not imply on the part of the World Bank Group any judgment on the legal status of any territoryor the endorsement or acceptance of such boundaries.

The material in this publication is copyrighted. The World Bank encourages dissemination of its workand will normally grant permission promptly.

Permission to photocopy items for internal or personal use, for the internal or personal use of specificclients, or for educational classroom use, is granted by the World Bank, provided that the appropriate feeis paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A.,telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center beforephotocopying items.

For permission to reprint individual articles or chapters, please fax your request with completeinformation to the Republication Department, Copyright Clearance Center, fax 978-750-4470.

All other queries on rights and licenses should be addressed to the World Bank at the address above orfaxed to 202-522-2422.

ISBN: 0-8213-4994-5ISSN: 0253-7494

Carmela Martin is the Director of the European Economy Group at Universidad Complutense deMadrid and Head of Programme on European Studies at FUNCAS. Francisco J. Velazquez is a member ofthe European Economy Group at the Universidad Complutense de Madrid and FUNCAS. Bernard Funckis a Lead Economist in the Poverty Reduction and Economic Management Unit of the World Bank's Eu-rope and Central Asia Region.

Library of Congress Cataloging-in-Publication Data

Martin, Carmela.European integration and income convergence: lessons for Central and Eastern

European countries / Carmela Martin, Francisco J. Velazquez, Bernard Funck,p.cm. -- (World Bank technical paper; no. 514) (Europe and Central Asia poverty

reduction and economic management series)Includes bibliographical references.ISBN 0-8213-4994-51. Income distribution--European Union countries. 2. Income distribution--Europe,

Eastern. 3. Income distribution--Europe, Central. 4. European federation. I. Velazquez,Francisco, J., 1967-II. Funck, Bernard, 1959- III. Title. IV Series. V. World Banktechnical paper. Europe and Central Asia poverty reduction and economic managementseries

HC240.9.15 M37 2001339.2'0947--dc2l

Page 5: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Contents

Foreword ............................................................... ivAbstract ............................................................... vAcknowledgements .............................................................. viExecutive Summary ............................................................... 11. Economic Integration and Real Convergence: Survey of the Theoretical Literature ................ 32. Real Convergence: Measurement and Empirical Evidence ......................................................73. Real Convergence within the Eu: The Case of the Cohesion Countries ....................................9Figure 3: Decomposition of Per Capita GDP Growth ........................................ 134. The Experience of the Central and Eastern European Candidates .......................................... 235. Concluding Remarks .............................................................. 29Methodological Appendix .............................................................. 30References ............................................................. 33

Figures

Figure 1: Per Capita GDP at Current Exchange Rates, 1960-2000 ......................................... 9Figure 2: Per Capita GDP at PPS, 1960-2000 ............................................................ 10Figure 3: Decomposition of Per Capita GDP Growth ............................................................. 13Figure 4: Technological Spillovers, percent of GDP, 1996 ..................................................... 16Figure 5: Foreign Direct Investment Inflows, percent of GDP ............................................... 17Figure 6: Share of Technology Intensive Sectors ............................................................ 18Figure 7: Telecommunication and Internet Infrastructure in July 2000 .................................. 19Figure 8: CEEC and CIS Per Capita GDP at PPP: 1991-99, percent of EU average ............. 24Figure 9: CEECs: Per Capita GDP at PPS: 1990-2000, compared to EU average ............. ... 25

Tables

Table 1: Decomposition of GDP per Capita Growth, 1980-1998, percent .............................. 12Table 2: Endowments in Various Forms of Capital ............................................................ 14Table 3: Cohesion Countries: Key Macroeconomic Indicators .............................................. 20Table 4: EU Budget - Net Balances with Member Countries, percent of GDP ...................... 21Table 5: CEECs: Labor Productivity in Industry, base year = 100 ........................................ 24Table 6: CEECs: Sources of Technological Spillovers .......................................................... 26Table 7: CEECs: Factors Conducive to Real Convergence .................................................... 27

..

Page 6: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Foreword

The Poverty Reduction and Economic Management Unit in the World Bank's Europe andCentral Asia Region has been undertaking a series of analytical works on issues pertinent to theeconomies in the region. These issues include transition issues; issues of economic integrationpertinent for the Central and Eastern Europe countries which are candidates for accession to theEuropean Union; poverty issues; and other economic management issues. The analytical workhas been conducted by staff of the unit and other Bank staff, as well as specialists outside of theBank.

This technical paper series was launched to promote wider dissemination of this analyticalwork, with the objective of generating further discussion of the issues. The studies published inthe series should therefore be viewed as work in progress.

The findings, interpretations, and conclusions are the author's own and should not beattributed to the World Bank, its Executive Board of Directors, or any of its member countries.

PPr-adeepf.M~itraSector Director

Poverty Reduction and Economic Management UnitEurope and Central Asia Region

iv

Page 7: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Abstract

The prospect of enlarging the EU to Central and Eastern European countries with incomelevels far below those of present members is raising questions as to how and when thecandidates' aspiration to converge towards EU standards of living could possibly be fulfilled. Toaddress this question, this paper seeks (i) to assess of the convergence experience of the :four lessdeveloped EU members (i.e., Spain, Portugal, Ireland and Greece), after joining the EIJ, in thelight of recent analytical developments; and (ii) to explore what lessons can be learned from thatexperience which may be useful for the CEEC candidates.

The discussion suggests that, while theoretically possible, there is little empirical reason tofear that European integration would cause economies to diverge. Rather than beingspontaneous, however, real convergence would seem to depend crucially on the capacity ofcountries to tap international technological spillovers, particularly through foreign directinvestment. Macroeconomic stability, effective competition on goods and factor markets, and agood human capital endowment are essential to harness these benefits. Nonetheless, lingeringworries about the possibility that integration would lead to real divergence between coumtries orregions of Europe has led to the creation of large transfers under the EU's Regional Policy.Pending more conclusive evidence of their effectiveness, the candidate countries would seemwise to put greater store by those domestic policies than by EU grants to fuel their convergence.

v

Page 8: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Acknowledgements

Carmela Martin (carmelamartinCdiccee.ucm.es) is the Director of the European Economy Groupat Universidad Complutense de Madrid and Head of Programme on European Studies atFUNCAS. Francisco J. Velazquez ([email protected]) is a member of the European EconomyGroup at the Universidad Complutense de Madrid and FUNCAS. Bernard Funck is a LeadEconomist in the Poverty Reduction and Economic Management Unit of the World Bank'sEurope and Central Asia Region. The authors wish to thank Bill Easterly, CostasMichalopoulos, Jerald Schiff, and Maurice Schiff as well as other colleagues for their insightfulcomments on an earlier draft. The view expressed in this paper remain theirs however, and donot necessarily reflect those of the World Bank.

vi

Page 9: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Executive Summary

Standard international trade theory, based on neoclassical growth models, predicts thatthe lifting of barriers to trade and to the free movement of factors across countries not onlyenhances the general economic welfare of the integrating area as a whole, but would also causesincome per capita to converge among its member countries (real convergence). Recent growthand geography models have cast doubts as to the general applicability of these optimisticconclusions. Rather, these models suggest that, under certain circumstances (differences inproduction technologies, increasing return to scale, positive agglomeration externalities andtransport costs), economic integration may lead to an increasingly uneven spatial distribution ofeconomic welfare (real divergence). Compounding these theoretical uncertainties, a debate hasset in the empirical literature, as to the proper way to define and measure real convergence.When all is said and done, however, most of the theoretical and empirical literature leans in favorthe proposition that some form or the other of real convergence is the most likely outcome ofeconomic integration.

There is also widespread agreement that the integration of Europe led to substantialeconomic benefits for the European Union, as a whole. Lingering worries about the possibilitythat integration would lead to real divergence between countries or regions of Europe howeverconstitute the main rationale for the large transfers under the EU's Regional Policy. Moreover,the prospect of enlarging the EU to Central and Eastern European countries (CEECs), withincome levels far lower level of development than that of present members, is raising questionsas to how and when the candidates' aspiration to converge towards EU standards of living couldpossibly be fulfilled.

In this context, the main purpose of this study is (i) to assess of the convergenceexperience of the four less developed EU members (i.e., Spain, Portugal, Ireland and Greece),after joining the EU, in the light of recent analytical developments; and (ii) to explore whatconclusion could be inferred from that experiences that may be useful for the CEEC candidates.

The discussion suggests that, while theoretically possible, there is little empirical reasonto fear that European integration would cause economies to diverge. Rather than beingspontaneous, however, real convergence would seem to depend crucially on the capacity ofcountries to tap international technological spillovers, particularly through foreign directinvestment. Macroeconomic stability, effective competition on goods and factor markets, and agood human capital endowment are essential to harness these benefits. Pending more conclusiveevidence of their effectiveness, CEECs would be well advised to put more store by thosepolicies, than by EU grants, to fuel their convergence.

In discussing these points, we will begin (chapter 1) by summarizing what theory tells usabout convergence prospects, including what can be learned from the recent endogenous growthand new geography models. Then, in chapter 2, we will probe further measurement issues, offera critical survey of the most common methods used in empirical research, and highlights majorfindings. Against this analytical background, chapter 3 explores, first, the nature and trends ofreal convergence of the four less developed EU members using the measures proposed before

1

Page 10: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

and, second, the explanatory factors that may account for their varying performances. Specialemphasis is placed on the role of different capital stocks, both physical and intangible. Chapter 4discusses the extent to which the experience of those EU member states is useful for the designof an appropriate strategy for the candidate countries from the CEECs, taking into account notonly the different catch-up experiences of the four cohesion countries, but also what we knowabout incipient trends among Central and Eastern European candidates. Finally, chapter 5 offerssome concluding remarks.

2

Page 11: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

1. Economic Integration and Real Convergence: Survey of the Theoretical Literature

Broadly speaking, economic convergence in an area formed by different countries(regions) is understood to mean the increasing alignment of the economic variables considered,due to more rapid advances in the less favored countries (regions) than in the average of the area.Two types of economic convergence are usually considered: nominal and real. Nominalconvergence refers to the tendency towards a greater uniformity of nominal variables (thoseindicative of macroeconomic stability). Real convergence expresses the approximation of thelevels of economic welfare, generally proxied by per capita GDP'. This paper focused on realconvergence, and deals with nominal convergence only to the extent that it influences the latter.

Standard neoclassical growth models2 predict that open economies (i.e., cotntries,regions) should converge. Assuming that technologies are identical and exogenous, thedynamics of convergence rest on decreasing returns to scale to capital: countries (regions) withlow capital stocks and per capita income should have a higher marginal product and return tocapital. Consequently, opening up the country (region) -as happens in the framework: of anintegration process- should trigger a convergence process, as capital should flow to capital-scarce countries (regions) to take advantage from higher returns. This should lead to more rapidcapital accumulation and faster growth in poorer countries (regions) than in rich ones. Alongwith capital/labor ratios, labor productivity and per capita income would then converge acrosscountries.

This line of reasoning has actually formed the basis of conventional theories of economicintegration developed since the pioneering work of Viner (1950).3 Thus, those models - sharingthe assumptions of neoclassical growth theory - generate a tendency for prices, costs, and incomelevels to converge, with trade and international factor mobility acting as the convergencemechanisms. This process of real convergence is further stimulated in the case of monetaryunion by the reduction of transaction costs (including the elimination of foreign-exchangeuncertainty) associated with trade and factor movements.

These standard conclusions have however been challenged. First, a number of authorshave pointed out that, the welfare effects of economic integration are more ambiguous (even inthe neo-classical setting) when, as in the case that occupies us (i.e., European integration), tradeopening is only partial and takes the form of preferential trading agreements (see Panagariya,2000). Obviously, the wider the preferential trading zone (e.g., with EU enlargement), the morelikely it is to approximate the effects of fully multilateral regime.

Furthermore, new models have emerged in the last fifteen years, notably under the aegisof the new growth theory, which (contrary to the neoclassical paradigm) do not predict thatincome convergence between rich and poor countries (regions) is the only possible outcome of

'Martin and Velazquez (2001) argue that per capita GDP has some shortcomings as a proxy for economic velfare.In this sense, they propose the use of other complementary variables that can somehow capture the differences inincome inequality. However they also admit that they are difficult to put into practice, due to the paucity ofintemationally homogenous income distribution data.2 As in Solow (1956) and his following versions, for example Mankiw, Romer, and Weil (1992).3Hine (1994) and Baldwin and Venables (1995) offer revisions of the theory and summarize the results of the mainempirical studies.

3

Page 12: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

economic integration.4 Thus, according to one of its first contributions (Romer, 1986), returns tocapital do not have to be diminishing. Once this assumption is relaxed, the impact of economicintegration on convergence is not as clear as in the Solow setting. In the approach proposed inLucas (1988), where increasing returns on human capital are the main driving force of economicgrowth, there is a distinct possibility that a "brain drain" from poorer to nrcher country could actas a vehicle of cross country divergence. Finally, some endogenous growth models that, in thesame vein as Romer's (1990), emphasize the importance of commercially oriented R&D effortsas the main engine of growth, may also explain the existence of permanent, and under somecircumstances, even widening, technological and income gaps between countnres.

Pursuing a separate argument, the new geography literature pioneered by Krugman(1991) and reviewed in Ottaviano and Puga (1998) has put forward several reasons (notably theexistence of agglomeration economies) to explain why economic integration may lead to apattern of increased spatial income inequality.

A characteristic feature of these models is that they assume the existence of knowledgespillover effects of an international scope. Thus, by considering that imitation is cheaper thaninnovation, these models imply that convergence through technological diffusion is a likelyoutcome.5 Apart from taking into account contracts for transfer of technology, they emphasizethe role of trade and foreign direct investment as channels for technology spillovers.6

Other channels are also considered in the literature. Studies7 that focus on how tradespreads technology spillovers, underline the special importance of transactions in intermediategoods. They also envisage a similar role for trade in final goods, in particular in those that allowfor reverse engineering by the importing country.

In this respect, some of the most elaborated and realistic formulations of innovation-dnrven growth models also stress the complementarity between both domestic R&D and foreignR&D spillovers and human capital investments. Thus, both the level (stock) and rate ofinvestment in human capital prove crucial in those models for growth not only as a separatefactor but also as a complement for exgloiting the effects of new technologies created by eitherdomestic or foreign innovation efforts. In this context, human capital is usually considered asar. essential condition for convergence.

4 A detail view of endogenous growth models developed since the early 1980s can be found in Barro and Sala-i-Martin (1995); Grossman (1996) and Aghion and Howitt (1998), and a recent survey of the empirical evidence ispresented in Temple (1999).5 Historians have long argued that technology transfer favored by relatively cheap imnitation -what Gershenkroncalled the "advantage of backwardness"-- is a key driving force behind economic growth.6 See for example Blomstrom and Wolff (1994), and Baldwin, Braconier and Forslid (1999) and references therein.7As Nadiri (1993), Nadiri and Kim (1996), Coe and Helpman (1995), and Keller (1999).8 Indeed, as argued in Cannon (2000), there is a tendency to integrate the two existing approaches to analyzing therelationship between education and growth. The first, initiated by Lucas (1988) is based on the idea that growth isprimarily driven by the rate of accumulation of human capital. The second, which has its origin in the contributionby Nelson and Phelps (1966), describes growth as being driven by the stock of human capital, which in turn affects acountry's ability to generate and imitate technical progress.

4

Page 13: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

In addition, some studies9 underscore the importance of public capital in general, andmore specifically the endowment of infrastructure, because of their significant positiveexternalities on productivity. Those externalities seem to be particularly large in the case of thetransport and communication infrastructure.'0

Finally, this brief overview of the recent literature on convergence and related issueswould not be complete without mentioning the studies that have analyzed the relationshipbetween nominal and real convergence. This topic has recently drawn considerable andincreasing attention in view of the quite large number of countries that have experienced rapidand non-inflationary growth accompanied by a significant generation of employment in aframework of a stringent fiscal policy.11 In a context of increasing globalization, the key factorhere would be the credibility effect associated with strict stabilization policies, as it translates ina reduction of the country risk premium on interest rates.

Summing up, the literature is less than fully conclusive as to whether or not economicintegration on its own generates real convergence. Indeed, when the stricter assumptions of thepure neoclassical growth model are relaxed (particularly that production technologies areidentical and exogenous across countries), opening up to trade and factor mobility may become asource of divergence. Indeed, in some versions of endogenous growth models integration,although still leading to aggregate welfare gains, may potentially result in income polarizationprocesses. To clarify the debate, Boldrin and Canova (2000) proposes to distinguish the variousavailable models according to whether they embody:12

(a) A stronig version of the convergence hypothesis which states that due to decreasingreturn on capital "in the long run, a common level of economic well-being beachieved, independently of initial conditions and independently of the detail of[national] policies, as long as the diffusion and adoption of technological innovationis not seriously restrained."

(b) A weak version which emphasizes the deterrnining role of initial conditions,endowments in immobile factors, and national policies in the adoption oftechnologies.

(c) A strong non-convergence hypothesis under which, due to high fixed costs,widespread increasing returns and external effects (e.g., agglomeration effects),"any increase in the degree of trade openness is likely to send the most productive

9 See as an example Aschauer 1989, 2000; Munnell 1990; Easterly and Rebelo, 1993 and Argimon et al. (1997)

'( See Easterly and Rebelo 1993; Roller and Waverman, 1994. Studies have also shown how important, as fortelecommunication and Internet infrastructures are for the technological upgrading of the whole product:ive system(Crandall, 1997 and Koski and Majumdar, 2000).

i' See Perotti (1996) and Alesina and Perotti (1995,1996).

12 The significance of those disagreements should however be not misunderstood. What is therefore suggested inmost "non-convergence" studies, is not the advantage of autarky, but rather the need for poorer countries to enlargeand improve their endowments in those capital assets which are deemed to have a special influence on growth (bethey technology, human capital and infrastructure). In addition, most of those models argue that the existence ofinternational technological spillovers make it possible for countries to implement a strategy of growth based onimitation of foreign innovations, provided they have a good enough human capital endowment to do so.

5

Page 14: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

factors flowing towards the advanced regions, where their return is higher, leavingthe disadvantaged area further behind." (id.)

(d) A weak non-convergence hypothesis (akin to the infant industry argument) whichargues that "some minimum absolute level of the externalities-inducing factorsmust be obtained" for global convergence to set in. Absent this, such models arelikely to generate "club convergence," (id.) under which countries with similarendowments in the strategic factors tend to converge into clusters.

6

Page 15: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

2. Real Convergence: Measurement and Empirical Evidence

In the circumstances however, it befalls on empirical analysis to arbitrate amongconflicting theoretical claims. Although not free of ambiguity itself, the current researchgenerally would seem to lean towards associating economic integration with some version of theconvergence hypothesis (be it weak or conditional). Before getting to that conclusion, however,the various authors working in the field first had to clarify what the word "convergence" meantin practice in the way that can be tested empirically.

The specialized literature has come up with a wealth of different measures and openlydebated on their relative merits.13 The simplest indicator for assessing real convergence betweencountries (regions) within an area is to test whether the per capita GDP of a country (region) or aset of countries is approaching the average of the area. The two most popular measures are thebeta-convergence and sigma-convergence. The former implies that the poor countries (regions)grow faster than the richer ones and it is generally tested by regressing the growth in per capitaGDP on its initial level for a given cross-section of countries (regions). In turn, this beta-convergence covers two types of convergence: absolute and conditional (on a factor or a set offactors in addition to the initial level of per capita GDP). In contrast, sigma-convergencedesignates the reduction in the dispersion of per capita GDPs within a sample of countries(regions).'4

The methodology proposed by Barro and Sala-i-Martin to test beta-convergence has beencriticized for producing biased results. Quah (1993, 1995, and 1996) argues that thismethodology largely neglects the dynamics of changing national (regional) income distributionsand proposes the use of a complex method based on the use of Markov chains to capture thedynamics of the entire cross-county distribution. More recently, Boyle and McCarthy (1997 and1999) have suggested the use of the Kendall index of rank concordance -referred to as gamma-convergence- in addition to sigma-convergence in testing for beta-convergence. That measureseems, therefore, more adequate to capture the possible mobility of countries (regions) within thedistribution of income levels over time.

None of the existing measurement procedures mentioned above is generally accepted asinherently superior to the others in any circumstances. Probably because of its intuitive appeal,the first approach (i.e., beta-convergence) remains the most commonly used. It is also the one towhich we will refer in the remainder of this paper.

Although methodological debates have been fierce, they have generated little empiricalevidence to support the idea that economic integration would lead to "real divergence."Subsequent research has nonetheless tempered much of Barro and Sala-i-Martin's initialoptimism'5 about powerful convergence forces might be. Quah (1996) for instance saggests thatthe cross-country distribution of income may have a tendency to evolve towards "twin peaks"pattern, so that the world appears to polarize into distinct classes of income. In other words,

13 See Baumol, Nelson and Wolff(1994), Barro and Sala-i-Martin (1995), Quah (1993, 1996) and Grossman (1996)for references.14 See Barro and Sala-i-Martin (1995:11) for further details.

5 Which suggested that income per capita mnight be converging at a rate of 2 percent per year.

7

Page 16: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

countries seem to follow different growth paths and to converge to distinct steady states andcluster around different levels of per capita GDP.

In one of the most comprehensive study to date, Ben-David (2000) concludes that levelsof income per capita have been diverging across countries over the period 1960-85 -- or at anyrate, they would not have converged (if weighted by population).'7 Worse, the study findsevidence of club-convergence at the bottom end of the distribution, due not to any welfareimprovement but to the downfall of countries initially better off. The study however findsconvincing evidence of convergence among those countries which have opened up tointernational trade; the more so the more the latter countries actually trade among themselves.

16 Confirming similar findings by Pritchett (1997) over a longer timeframe.

7 Many thanks to Peter Klenow from the Federal Reserve of Minneapolis for pointing that out.

8

Page 17: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

3. Real Convergence within the Eu: The Case of the Cohesion Countries

Does this encouraging result also apply to countries joining the European Union? Aquick glance at Figure 1 (showing the evolution of current GDPs per capita relative to the EUaverage) suggests so. The picture emerges more clearly when the impact of exchange ratefluctuations is netted out, as in Figure 2 -- which shows the trend of their respective per capitaGDP in relation to the EU average, expressed in PPS (Purchasing Power Standard).18

Figure 1: Per Capita GDP at Current Exchange Rates, 1960-2000

250

200 -_ ____

150 _ - -

USA

.cD

- 100 - g. tv.

Ireland

_________________________Spain

50 - = Greece

Portugal

CN N 0

Source: World Bank data

Figure 2 illustrates essentially two things. One is that the European Union as a vwhole hasbeen steadily converging towards the level of income per capita in United States (reflectingperhaps the benefit of integration for the Union as a whole). The second is that the lower income

18 The purchasing power standard (PPS) is defined in such a way that, for each individual aggregate, the. EuropeanUnion total obtained from converting the values in national currency with the purchasing power parities is equal tothe European Union total for that individual aggregate in ecus/euros. In a sense, the PPS can therefore be thought ofas the ecu/euro in real terms (EUROSTAT, 1999).

9

Page 18: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

members of the Union (the so-called cohesion countries, to denote their eligibility for the EU'sCohesion Fund)19 have been converging towards the EU average.

Whether, and to what extent, any of this is linked to their belonging to the EuropeanUnion is a different matter. First, as the Figure shows, all cohesion countries were alreadyconverging towards EU average in the 1960s, i.e., well before their joining the Union. Similarly,Ben David (2000) shows that members of the European Free Trade Area were also convergingwith the EU well before the two zones formally merged -- although only after the EFTA internaltrade began to be liberalized after 1967 and that with the EFTA after 1968, in the wake of theKennedy Round). It is also notable that this convergence seems to have lost steam quickly aftermembership, as the effects of trade liberalization waned.20 Similarly, two of the cohesioncountries (i.e., Ireland, and Greece) had to wait about a dozen years after joining to experienceany further convergence at all. Indeed, for all cohesion cases, the process of convergence withinthe Union seems to have taken hold in earnest only after the launch first of the Single Market,then the Economic and Monetary Union, i.e., when firmly supported by other structural andmacroeconomic policies.

Figure 2: Per Capita GDP at PPS; 1960-2000

200 -

180 ---l--

160

USA

140 -- - - - - -

e 100

__80_--X 7,_ Spain80 ~ - _==Portugal

Greece60 __

20 - - ._

0

1960 1965 1970 1975 1980 1985 1990 1995 2000

Source: European Commission

19 The Cohesion Fund was created in 1993 in the wake of the Maastricht Treaty to help poorer member countriescope with the demands of monetary union.

20 See Ben David, 1993.

10

Page 19: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

This actually points to a larger question: what do we actually mean by "integrating withthe EU"? While adhesion can be dated with precision,2 1 integration is a more diffuse notion. Aswould be the case later for CEECs, trade integration (for industrial goods) often started wellahead of membership under association agreements.22 Furthermore, the Union itself has beenintegrating only gradually. While a common trade policy was essentially achievecl by the late1960s, one had to await the late 1980s to see a single market in goods, services and iactors beginto emerge, and until the late 1990s for the monetary union to firm up. It is difficult in thecircumstances to ascribe convergence to any specific policy event.

This being said, Ben-David (2000) provides convincing evidence that trade liberalization(before and after membership) was, if not a sufficient condition, at least an importantcontributing factor leading to convergence, and that the periods of most intense progress in thefield were also associated with such convergence accelerating.2 3 In contrast, in his seminal paperon the convergence experience of the founding six members of the EU (1993), the same authorfound no sign of convergence among a reference group of other countries with incomes percapita covering the same range as that of the founding members.

On the "real" side, as theory anticipates, income convergence appears to have beenassociated with a convergence of labor productivity. A decomposition of per capita GDPgrowth from 1980 onwards -- presented in Table 1 and also, in a more intuitive way, in Figure324 indicates (i) that labor productivity, and more particularly hourly productivity, accounted formost of the changes in average income over the period in all cohesion countries; and (ii) that thecountries where productivity grew most (Ireland being the star performer) are also those whereincome per capita converged more rapidly towards EU average (and vice-versa in the case ofGreece, which diverged during the period under review). The fact that all four countries (withIreland and Portugal in the lead) also managed to raise employment rates amplified welfaregains.

What would account for these productivity perfonnances? As noted above, standardneoclassical first direct our attentions towards the role of aggregate technologies, as encapsulatedin capital/labor ratios. Estimates shown in Table 225 suggest indeed that the stock of privatecapital per worker would have converged during the period towards EU levels in all countries,except in Greece - the only country, as we saw, where labor productivity also slipped furtheraway from EU levels.

21 Ireland, 1973, Greece, 1981; Portugal, Spain, 1986.

22 Effective, as regards trade, from 1968 in the case of Greece, from 1970 for Spain and from 1976 for Portugal.23 Ben-David (1993, 2000) shows that members of the European Economic Community had experienced greaterincome convergence than in the industrialized countries as a whole.

24 For a correct interpretation one should note that those figures are not expressed in absolute but in relative terms.Specifically, they represent the contribution (in percentage) of each component to the per capito! GDP growth ineach country.25 The stocks of private physical capital of Spain, Portugal, Ireland, Greece, the EU and USA, are estimated on thebasis of the accumulation of the respective series of private Gross Fixed Capital Formation (GFCF)., convenientlydeflated and depreciated, under the Perpetual Inventory Method.

11

Page 20: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Table 1: Decomposition of GDP per Capita Growth, 1980-1998,percent

European UnitedGreece Spain Ireland Portugal Union States

GDP per capita 100,0 100,0 100,0 100,0 100,0 100,0

Labor productivity 75,1 86,2 85,7 71,0 96,1 67,7

Hourly productivity 60,1 114,1 86,8 88,4 108,9 67,7

Purehourlygrowtheffect 15,9 112,3 111,1 63,4 96,1 73,2Structural change effect in hourly 48,1 20,4 3,9 47,0 28,5 23,5productivity growthResidual effect -3,9 -18,6 -28,2 -22,0 -15,7 -29,0

Working Hours 15,0 -27,9 -1,1 -17,4 12,8 0,0

Employment rate 24,9 13,8 14,3 29,0 3,9 32,3

Employment/Labor force -38,0 -16,1 -2,9 4,2 -10,5 7,5Activity rate 44,6 14,2 6,3 12,8 6,6 28,8Population 15-64 years/Total population 18,3 15,7 10,9 12,0 7,8 -4,0

Memo itemGDP per capita growth 25.2 49.6 130.3 65.0 39.4 35.1Source: EUROSTAT and author's calculation

12

Page 21: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Figure 3: Decomposition of Per Capita GDP Growth

Breakdown of Per Capita GDP growth 1980-1998

140 130.3

120 0

410

60 49.6

4~~~~~~~~~ 04. 4. 39.4 3 7.4 35.40 25.2 _ 1 16*3 1 222

20 _

Greece Spain Ireland Portugal EU 15 USA

13GDPpc *Labour productivity OEmployment rate

Breakdown of Labour Productivity Growth 1980-1 998

140

120g9 100.6

100-_ _8 0 88.

aea _ 6 5

40.5 41 324451

e) ao - _ | 11 _ _ r _ ~~~~~~~~~~~~~~~~~~~~~~22 2 22 2l!20- 1_1 14 ___

-40Greece Spain Ireland Portugal EU 15 USA

| Labaur preductvitny *Houarty produectivity DW urkin 8 time|

Decomposition of Emplovment rate 2rowth 1980-1998

25 4

20 j a

(:1~~~~~~~~~~~~~~1-4 0

-10 l --.

1 15 j -~~11.6

Greece Spain Ireland Portugal EU15 USA

25 -

| 13Employmentrate *EmploymentLabourforce DActivityrate 13Population 15-64 yearaTotalPopulation l

Source: EUJROSTAT and authors' calculation

13

Page 22: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Table 2: Endowments in Various Forms of Capital

1. Private Capital 2. Public Capital 3. Transport Infrastructure 4. Human Capital 5. Technological Capital(per person employed) (per capita) (per person employed) (per capita) (domestic)

(relative to GDP)

% EU Growth Conver- % EU Growth Conver- % EU Growth Conver- % EU Conver- % EU Growth Conver-aver age gence aver ge gence average gence average gence average gence198 1998 % % 1980 1998 % % 1980 1998 % % 1980 1998 % 1980 1998 % %

Greece 76.3 68.9 24.8 -23.7 47.6 62.3 67.9 39.1 77.6 67.5 1.9 -30.9 37.8 42.5 8.1 11.0 21.7 181.8 13.7Spain 64.6 75.7 61.9 45.7 31.2 68.5 181.3 118.4 75.2 74.9 16.7 -0.9 58.0i 70.3 41.6 19.0 38.5 189.5 31.7Ireland 74.6 76.2 41.2 6.8 82.7 82.3: 27.6 -2.4 129.0 111.6 1.3 149.8 61.2' 69.3 26.4 52.0 44.1 21.2 -14.1Portugal 40.0 44.5 53.8 8.1 28.3 50.0 126.8 43.5 88.1 78.7 4.6 -44.3 42.8 48.1 10.2 15.0 23.1 120.0 10.5

EU 100 100.0 38.2 0.0 100.0 100.0 28.2 0.0 100.0 100.0 17.1 0.0 100.0 100.0 0.0 100.0 100.0 43.0 0.0USA 95.1 89.3 29.7 -54.3 80.5 79.4 26.5 -5.3 182.4 156.2 0.3 46.6 227.4 197.0 31.3 132.0 124.5 34.80 30.6

Source: EUROSTAT and authors' calculation

Page 23: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

What about those other factors whose roles new models emphasize? Figares in Table 2would seem to suggest that the advances countries have made in building their stock of humancapital 26 could have played a role in lifting productivity (the counter-performance of Greeceagain confirning the rule). In contrast, there is little primafacie evidence that the accumulationof other forms of physical capital --public capital and infrastructure -- 27 would have generatedmuch external effects (e.g., agglomeration effect). The country that did most in this respect, i.e.,Spain, has not been rewarded with any particularly impressive growth performance (it ranks thirdon this score among the four cohesion countries), while the country which exhibit stellar growthperformance, Ireland, did not progress towards EU levels of public capital. Furthermore, if itsdensity of transport infrastructure did converge towards EU levels, that convergence was actually"downwards," i.e., from above average. 28

The contribution of technological capital seems also at first ambiguous.29 Table 2 showslittle correlation between the efforts countries have made in R&D and their growthperformances. The two countries which put more of their resources into expanding domestictechnological capital (i.e., Spain and Greece) actually grew more slowly than the others did.

As mentioned in chapter 1, however, the recent growth literature has not only emphasizedthe importance of domestic R&D and human capital investments, but also that of theinternational diffusion of technology, through a variety of channels. In addition to the mostconventional and direct channel, the international contracts for transfer of technology, newmodels have stressed two other indirect ways for international diffusion of tec}nology throughknowledge spillover effects: trade and foreign direct investment. Consequently, in these models,given a level of domestic stock of technological and human capital, the processes of opening upand trade integration will tend to raise a country's rates of growth.

26 The best procedure for estimating the stock of human capital is the one followed in Barro and Lee (1993 and1996), i.e., to approach the human stock of a country in terms of the level of training of its working-age populationaccording to the years of schooling at all levels of education. This is, therefore, the method followed here.However, we will introduce an improvement trying to overcome the criticisms that the Barro and Lee (1993 and1996) estimates have received, namely: not taking into the consideration the likely differences of quality across theEducation Systems of the countries. Consequently, our estimated series of human capital stock introduce acorrection, based on data on the cross country differences in education expenditure per student at every level ofteaching, in an attempt to get data in terms of the same quality standard.

27 The stocks of public capital have been obtained by applying the same procedure to the corresponding series ofpublic GFCF. The transport infrastructure endowment of each country has been estimated by calculating thearithmetic mean of the availability of kilometers of "standard motorway" per square km. and per capita.

2S In their detailed analysis of disaggregated data at the NUTS-2 level, Boldrin and Canova (2000) similarly findlittle correlation between accumulation of public and transport infrastructure and regional growth performance.

29 As for the stock of technological capital, there is a wide consensus in considering that it can be reasonablyapproached by the accumulation of the R&D spending following the perpetual inventory method. We have,therefore, applied this method to the series of data of R&D provided by the OECD since 1973, using as a deflatorthat of Gross Fixed Capital Formation and assuming a depreciation rate of 10%. The use of the R&D expendituresas an indicator for the technological development has received two kinds of criticism. On the one hand, it has beenclaimed that R&D spending is an overstated measure of the efforts in technological activities in view of the highrates of failures that are likely to occur in R&D projects. On the other hand, others have argued its understatement,because it does not include the payments for imports of technology.

15

Page 24: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Available evidences seem much stronger in favor of that line of reasoning. To test thisassumption, we have proceeded in the following fashion. First, we have assumed that the OECDwas the relevant area of origin of all the cohesion countries' knowledge spillovers, as this wheremost of their imports of goods and technology as well as their direct investment inflows comefrom. This being posited, we have estimated the extent of technological spillovers coming fromtechnological imports by accumulating their external technological payments under the perpetualinventory method. As for the spillovers incorporated in the direct investment inflows, we havecalculated a weighted average of the stock of technological capital of each of the OECD membercountries using as weights the stocks of foreign capital received from each of them. Finally,technological spillovers through imports of goods have been estimated by the same procedure,using as weights the share of their imports coming from each of the OECD countries.30

Figure 4: Technological Spilloverspercent of GDP, 1996

6-

5-

4-

3-

2-

0

Greece Spain Ireland Portugal EU USA

| Foreign Capital * Imports of goods 0 Imported technological capital

Source: OECD, IMF, EUROSTAT and author's calculation

The results obtained (see Figure 4) show (i) considerable differences in the countries'abilities to harness technological spillovers; and (ii) an extraordinary correlation between thelatter and their productivity performance. Indeed, Ireland's capacity to tap such technologicalspillovers seems to have by far offset any disadvantages lower R&D efforts may have created.Apart from the significant role of imports in all countries, the most salient feature is, in ourview31, the extraordinary contribution of foreign direct investment in Ireland and also, althoughto a lesser degree, in Spain and Portugal. In contrast, the scarcity of inward investment flows in

30 More details about the data sources and the procedure used for the measurement of these spillovers are providedin the Methodological Appendix

3'1It should be noted that the impact of international technological spillovers on the economic growth of a countrydepends not only on its magnitude but also on its output elasticity. In this sense, Braconier and Sjoholm (1998)examine two potential channels for R&D spillovers -foreign direct investments and trade- for a group of OECDcountries, obtaining a higher elasticity associated with the spillovers transmitted through foreign direct investments.In addition, Martin, Velazquez and Crespo (2001) evaluate the impact of the intemational technological spilloverschanneled by imports on the economic growth of all the OECD countries and find that elasticity for such spilloversis quite low.

16

Page 25: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Greece is likely to have contributed the rather poor performance of this country as regards laborproductivity.

A more descriptive analysis of the trends of direct investment inflows irL each country -which have given rise to cumulative data graphically reported in Figure 5- reflects that in thecase of Ireland the majority of them come from USA and are concentrated in a rather smallnumber of sectors, and more specifically in sectors which have exhibited particularly strongexport performance.

Figure 5: Foreign Direct Investment Inflows,percent of GDP

20 0

10.0

5 0

00 _

Grc Spain -Ireld P tg

Source: EUROSTAT

Furthermore, it is worth noting that this inward direct investment boom seems to havebeen on the basis of the clear reorientation of both productive and trade structures towardsskilled-labor and technology-intensive sectors observed in the 90s in the Irish economy. Figure6 shows both trends, that in foreign direct investment and that in the share of technology-intensive sectors running in parallel. OECD (1999) documents in more detail how foreign directinvestment has been vital in the creation of an export-oriented, skilled-labor-intensive sector,concentrated in areas such as electronics, pharmaceuticals, and corporate services.

17

Page 26: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Figure 6: Share of Technology Intensive Sectors (*)

9.00

8.00eZ 6.00 -

I E 4.00 -4 3.00

2.00

1.00

0.001980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Portugal -Ireland Greece - Spain

(*) Chemical products, office and data processing machines, electrical goods and communication servicesSource: OECD, EUROSTAT and author's calculation.

These observation, of course, do not deny any role for public infrastructure, transportnetworks or domestic R&D, including in attracting foreign direct investment. It might well bethat (as under a weak convergence hypothesis) a minimum absolute level of them is needed to beable to take advantage of technological spillovers. The fact that absolute levels of endowmentsin public capital and even more so in transport infrastructures are larger in those cohesioncountries that have been more successful in raising theirper capita GDP toward the EU averagemay be a sign that certain absolute threshold may need to be crossed to exploit fullytechnological spillovers.

Another area where such thresholds may exist is telecommunications. The set oftelecommunication and Intemet infrastructure indicators reported in Figure 7 would seem rathereloquent in this respect: Ireland's figures are in all cases very close to the EU average and insome of them even above. On this score again, Greece is the laggard.

18

Page 27: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Figure 7: Telecommunication and Internet Infrastructure in July 2000

Digital telephone lines Cellular mobile subscribersper 10o0onhabtN s pe,s100inhabitoot

USA - USA S Z 53EU * EU 300

~~~~~~~~~~~~_. ......... : l,

ASIanS |t Af I,.I*ldn il|ll lllll

SpaS, Spain

Potug1C P5005.",,-1|

0 100 200 300 400 SOO SOO 700 s Sg 100 150 200 250 300 350 400 4S0

Some- EUROSTAT, OECD dnd Und d Nts Soun EUROSTAT, OECD md Ufted N.Ucna

Deployment of flbre optic cable Disponsable internet hostsI ~~~~~~~~ lm iOaInSo I I er 0000 nhabitants

USA USA

EU 4,12 EU

1Poretgal1,20 Portgal

Sans. 1,25 0 50.

0 20 40 60 80 100 120 140 16W 0 5 10 15 20 25 30 35

S|ouA OECD and Untd Nt ionS | - Oe CD, N50b WLond,. 1n0-1e SolFly

Web servers Secure web servers for electronic commerce|~~~~~~~~te 1f000 FaS,bit.,.S per 1.oo0.000 AflsbItBnts

|USA jiV USA

EU EU Q

|laSd Irlalnd

Spn- 0.S.

0 2 4 s 6 10 12 14 16 16 2| 0 20 40 60 6O tOO 120 140 160 180 20D

S__. OECD, Net-rIt and WanI mSot.y Sous:OECD, Nltc-a Sod MI-ot So r...

Source: EUROSTAT, OECD, UN, Network Wizards, Internet Society, Netcraft and author's calculation

Additionally, as discussed in chapter 1, the increasing globalization of internationalmarkets has heightened the importance of macroeconomic stability as a condition for economicgrowth and consequently for real convergence (both through its impact on the efficiency ofresource allocation and on the volume of investment, including from foreign sources). Table 3reveals in concrete terms the degree of parallelism, which exist between these two dimensions.

19

Page 28: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Table 3: Cohesion Countries: Key Macroeconomic IndicatorsInflation rate (percent)

Greece 24.7 23.0 14.4 2.7Spain 15.5 8.8 4.6 2.3Ireland 18.3 3.8 1.4 1.6Portugal 16.6 11.8 6.7 2.3

EU 13.1 3.7 3.6 1.1USA 13.5 1.9 3.0 2.1

Long-term interest rateGreece 17.1 15.8 19.3 6.3Spain 16.0 11.4 10.1 4.7Ireland 15.4 11.1 6.7 4.7Portugal 16.7 19.5 9.5 4.8

EU 12.8 9.2 7.8 4.7USA 10.8 8.1 5.8 6.1

Public gross debt (percent of GDP)Greece 23.9 53.6 111.6 104.4Spain 17.5 45.1 58.8 63.5Ireland 70.3 113.8 93.1 52.4Portugal 32.4 68.0 63.2 56.8

EU 38.4 54.5 65.8 68.1USA 37.0 52.3 63.4 54.2

Public budget deficitGreece 2.6 9.5 13.8 1.6Spain 2.6 5.7 6.8 1.1Ireland 12.1 10.5 2.3 (2.0)Portugal 8.7 5.9 6.1 2.0

EU 3.5 4.2 6.2 0.7USA 1.7 3.8 3.9 (1.7)

Source: OECD, EUROSTAT and IMF

The parallel experiences of Greece and Ireland are illuminating in this respect.32 In bothcases, EU accession was followed by a dozen-year spell of non-convergence which was onlybroken when the countries undertook macroeconomic stabilization. In the case of Ireland, thisinvolved turning around a fiscal deficit of nearly 16 percent of GDP in 1981 to a surplus of 2percent of GDP in 1998. The ensuing stabilization, combined with structural reforms, helpedattract the foreign direct investment (rising from less than 1 percent of GDP in 1973 to nearly 20percent of GDP in 1999) needed to build the foreign-dominated manufacturing sector which hasbeen the engine of the country's subsequent rapid convergence towards EU average income.Similarly, Greece first let its fiscal deficit deteriorate to over 21 percent of GDP in 1994 beforebringing it down to 2.9 percent in 2000 in a bid to join the euro-zone. Only then did Greecebegin to converge. In the meantime, however, high inflation (exceeding 10 percent until 1995)

32 See World Bank (2000).

20

Page 29: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

inhibited productivity (see Table 1), in part due to its deterrent effect on foreign directinvestment (which languished at only about 1 percent of GDP per annum).

A diagnosis of the real convergence achievements in the EU cohesion countries wouldnot be complete without discussing the contribution of the EU regional policy. While, in the firstyears of the European integration, regional policy was a rather insignificant issue, it has grown inimportance since the first enlargement in 1973 (when Demnark, Ireland and United Kingdomjoined the Union) to a point where it absorbs about one third of the EU budget (Euro 213 billionare programmed for the Structural and Cohesion Funds over the period 2000-06).

Officially, the main purpose of the European regional policy is to improve the long-termgrowth prospects of the Union's less prosperous regions, in an apparent fear that, shouldintegration proceed on its own, increasing returns and agglomeration effects would naturallyprevail, causing poorer regions to fall further behind (i.e., fears implicitly inspired by someversion of the divergence hypothesis mentioned above). Reflecting this concern, (i) most of thegrants provided under this policy have been directed towards enhancing poorer regions' humancapital endowments and infrastructures; and (ii) the four cohesion countries, on which thisanalysis focuses, have also been the main beneficiaries of the policy (see Table 4).

Table 4: EU Budget - Net Balances with Member Countries,percent of GDP

Country 1986-88 1989-93 1994-98Austria -0,3Belgium -0,5 -0,2 -0,4Denmark 0,4 0,3 0,1Finland -0,1France -0,1 -0,2 -0,1Gernany -0,5 -0,6 -0,7Greece 2,8 4,2 4,2Ireland 4,2 5,3 3,7Italy 0,0 -0,1 -0,2Luxembourg -1,0 0,7 0,0Netherlands 0,3 -0,1 -0,7Portugal 1,0 2,3 2,9Spain 0,2 0,5 1,3Sweden -0,4United Kingdom -0,3 -0,3 -0,3

Sources: European Court of Auditors: Annual Report; European Commission:The Community Budget. The Facts in Figures

The European Commission (see EC, 1999 for the latest) - supported by a number of otherstudies (Martin, 2000: Chapter 11 and others referred there in) has long maintained that theEuropean regional policy had had a positive effect on the narrowing the per capita income gapsacross the Union.

This assessment however has recently been challenged. First, in a detailed statisticalanalysis of regional data, Boldrin and Canova (2000) find little evidence of income convergenceat the regional level since the late 1970s or, more precisely, that what income convergence therehas been reflects mainly, national-level convergence. The apparent interruption of regional

21

Page 30: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

convergence after the late 1970s would be associated with a drying up of migration flows out ofpoorer regions (which had been the main engine of convergence up to then). Furthernore, theseauthors do not find that the availability of either EU aid or of the targeted public goods wouldhave any statistically discernable impact on the performance of beneficiary regions. Suchfindings lead Boldrin and Canova (2000) to wonder whether the true purpose for the EU regionalpolicy would not be, rather than to stimulate regional growth, to redistribute income in a bid todiscourage migration.

It might also be the case, as Herve (1999)33 suggests, that rather than leading to anincrease in the level of targeted public expenditures (e.g., on human capital and infrastructure),EU funding would instead have made it easier for countries to undertake non-targetedexpenditures (the fungibility argument familiar to donor agencies). In this case, the positiveimpacts reported by Martin and others might be due more the relaxation of external constraints,which regional transfers make possible, than to supply-side effects. Given the amounts at stake,further empirical investigation would seem warranted on this topic.

This brief analysis of the real convergence patterns of the four less developed countriesin the EU concludes therefore that, if all countries growth have benefited from trade integrationwith the European Union, their capacity to exploit the opportunities so created greatly dependedon their own domestic policies, particularly in the areas of macroeconomic stabilization, humancapital development, and openness to foreign investment.

Indeed, one cannot but be impressed by the extraordinary importance of direct investmentinflows. The capacity of the Irish economy to attract capital from abroad clearly stands out evenwith relation to the other EU cohesion countries, Spain and Portugal, which have also been veryattractive for foreign investors. At the other end of the spectrum, the meagerness of foreigndirect investment in Greece probably goes a long way towards explaining that country's stagnantcapital\labor ratio as well as its mediocre productivity performance. This being said, it is entirelypossible that the growth strategy followed by Ireland -greatly based on developing humancapital and harnessing international spillovers- would not have probably been as successful inthe absence of a good endowment in domestic R&D and network infrastructures

Finally, as far as the likely implications of EU membership, we noted the positive rolewhich seem to have played the Single Market and the European Monetary Union, as well as thedebates concerning the contribution of EU regional policy.

The respective stories of the four less developed EU members, with all theircommonalties as well as their striking differences, constitutes a real-life experiment of howconvergence actually operates in the framework of an ambitious regional integration process. Assuch it presents interesting lessons for the current candidates to accession. This is the subject ofthe next section.

33 Expanding on Herve and Holzmann, 1998.

22

Page 31: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

4. The Experience of the Central and Eastern European Candidates

For the ten CEECs (Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania,Poland, Romania, the Slovak Republic and Slovenia), the process of integration with the EUbegan with the signing of the European Association Agreements (EAs) with the EU34 and iscontinuously expanding as candidate countries endeavor to adopt the European acquiscommunautaire (as the body of European law is known) ahead of their full membership in theUnion.3 5

Alongside clear differences (the process of transition being one), the experience of thenew candidates presents also many similarities with that of the cohesion countries. Taken as agroup, the CEECs have grown in the 1990s at a somewhat higher rate than their future EUpartners. Convergence may have been slow and the remaining gap between CEEC per capitaGDP and that of the EU often substantial, the contrast is nonetheless striking with the experienceof that other group of country going through transition at the same time (see Figure 8). 36 Whilethe average income per capita (at PPP) of CEECs lagged 20 percent behind that of the CIS at thebeginning of the 1990s, it exceeded it by 50 percent as the decade drew to a close. As a result,the relative size of total GDP (at PPP) of candidate countries in Central and Eastern Europeexpanded from about one to about two third of that of the CIS over that decade.

This is not to say, of course, that EU integration could, on its own, account for suchdifferent trajectories. But integration with the EU undoubtedly helped, not only because of theaccess the candidate have gained to EU markets made their export-led recovery possible, but alsobecause the process of preparing for EU membership in itself has provided a framework and theimpetus for countries to forge ahead with the structural reforms and stabilization, whichmembership embodied.

34 The EAs were signed on the following dates: Czechoslovakia, Hungary and Poland (December, 1991); Romania(February, 1993); Bulgaria (March, 1993); the Czech and Slovak Republic (October, 1993) Estonia, Latvia andLithuania (June, 1995); and Slovenia (June, 1996).

35 Under this process, CEECs have gained access to EU markets through mutual tariff reduction or industrial goods(for industrial goods: immediate access to EU market against gradual elimination (by January 1, 2002 ) of tariffduties on EU imports into CEECs, a process now expanding to agricultural goods (double-zero approach), and non-tariff barriers ("single market" agreements). Already around 80 percent of industrial imports tariiFfs-free by 1999.Furthermore, the EA process has spurred more general trade liberalization more generally through a web ofcomplementary free trade agreements, CEECs have very low tariffs on industrial imports from preferential(accession and non-accession) partners. Around 85 percent of all industrial imports from these partners were duty-free in 1999. EAs have also helped CEECs attract direct investment, by with provisions on the mutual right ofestablishment of firms, the liberalization of capital flows, the movement of workers, and approximation of nationallaws with EU law (e.g., in the areas of competition, company, accounting; banking law; mergers, state aid;intellectual property)

36 To allow comparison, this figure uses World Bank data at Purchasing Power Parity (for which series exist for theCIS), instead of Eurostat ones at Purchasing Power Standard as in the rest of the paper.

23

Page 32: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Figure 8: CEEC and CIS Per Capita GDP at PPP: 1991-99percent of EU average

o 45 -

0, x

Lo 40

X 35:L{L

,,30 -------- ._

,., 25 ------- - -5

a- CU

D 20- - ---- --- - - -

~20-1991 1992 1993 1994 1995 1996 1997 1998 1999

oCEEC # CS

Source: World Bank calculations.

Looking beyond regional averages reveals indeed a wide variety of country experiences(see Figure 9), and directs attention towards, one, the different dynamics of productivity, and,two, the role of domestic policies in stimulating it. As in cohesion countries, the successfulinstances of growth recovery among CEECs have largely been driven by improvements in laborproductivity (see Table 5).

Table 5: CEECs: Labor Productivity in Industry,base year = 100

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Bulgaria 100.0 91.4 86.6 83.9 81.5 91.8 98.5 101.8 98.0. n.a.

Czech Republic 100.0 99.6 78.7 76.6 75.2 78.9 87.6 96.0 106.7 112.7

Hungary 100.0 100.4 82.4 91.2 107.9 115.8 128.4 140.0 160.0 181.3

Poland 100.0 78.9 69.5 81.3 92.1 105.0 112.3 123.5 138.5 147.2

Romania 100.0 75,9 59.4 53.1 58.7 64.7 77.6 87.0 87.9 101.9

Slovak Republic 100.0 99.0 81.0 78.9 81.8 89.4 94.1 96.5 100.4 112.0

Estonia n.a. n.a. n.a. 100.0 101.1 107.9 108.3 112.3 141.9 145.1Latvia n.a. n.a. n.a. 100.0 77.4 84.8 83.9 91.1 116.6 118.9Lithuania n.a. n.a. n.a. 100.0 77.6 68.2 76.4 82.9 89.2 99.0

Slovenia n.a. n.a. n.a. n.a. 100.0 111.8 121.2 129.3 135.1 142.4

n.a.: Not applicableNote: The indices have different base years because of differences in data availabilitv for the different countries.Source: World Bank calculations based on data from EBRD Transition Report, various issues.

24

Page 33: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Figure 9: CEECs: Per Capita GDP at PPS: 1990-2000,compared to EU average

80s

Slovenia

70 - _ _ _

Czech Rep.

o > Hungary

50 -4 _- _

D1] Slovak Rep.

1 \ \ _ ~~~~~~ ~~ - B . " ~~~ Ct,-10ffi_\ \ B Z ~~~~~~~~~~~~Poland

Esitonia

30- ~~~~~~~~~~~~~~~~~~~~~~LithuaniaLatviaRomania

Bulgaria

20 ---

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: EUROSTAT; Figures for 1990-94, and for 2000 are extrapolated based on constant price data inlocal currency.

While the transition to the market system undoubtedly played a part, open trade togetherwvith considerable amounts of foreign direct investments (FDI) have been also been key factors inlifting labor productivity. Not only have trade and FDI contributed to a redirection of exportsfrom the CMEA to the EU markets, they have been the main driving forces of the changes in thepatterns of industrial specialization of the CEECs (particularly Hungary and Estonia) away fromunskilled labor-intensive goods toward high-skilled, labor-intensive and technology-basedproducts (see World Bank, 2000 and references therein). Among the sources of t;echnologicalspillovers identified above, trade in goods and services has experienced such rapid growth over

25

Page 34: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

the last decade that many CEECs are now more open to trade than the EU is, and are alreadymore integrated in the EU than some of its current members. Similarly, in some of the mostadvanced candidate countries, cumulative FDI inflows have been comparatively higher than inthe EU (see Table 6).

Table 6: CEECs: Sources of Technological SpilloversExports of Goods and Services Imports of Goods and Services Cumulative Inward

Foreign Direct% of GDP Annual growth % GDP Annual growth Investment 1991-

(1999) 1989-1999 (1999) 1989-1999 1999 (% of GDP)(current US$) (current US$)

Bulgaria 44.1 -6.4 51.9 -9.6 18.5Czech Rep. 62.7 9.0 63.9 12.6 29.4Estonia 76.9 9.8 82.6 11.3 33.2Hungary 52.6 6.4 55.0 8.4 37.5Latvia 46.7 0.6 57.6 1.6 35.2Lithuania 39.8 - 50.1 19.6Poland 28.4 11.6 33.6 17.7 12.8Romania 30.1 4.6 34.6 4.4 15.9Slovak Republic 64.8 11.3 69.9 8.3 10.2Slovenia 55.7 0.6 58.4 4.5 6.3

European Union 34.6 6.7 33.2 6.1 15.2Sources: World Bank (for the CEECs), EUROSTAT and UN (for the EU) and author's calculation

EU integration has provided a critical impetus to these inflows of FDI into the CEECs(EBRD, 1999, World Bank, 2000). Indeed, beyond providing the countries preferential access toEU markets, several aspects of the Europe Agreements (EAs) have facilitated the relocation ofEuropean multinationals into the CEECs and their integration into the latter's global productioncycles, including the right of establishment for EU firms, the approximation of EU economiclegislation and the adoption of the European acquis communautaire by the CEECs, and thecapacity given to the CEECs to use a duty drawback scheme (that is, refund to exporters to theEU for duties paid on imported inputs) to attract foreign investors from outside the EU.

This European factor did not operate in isolation, though. The case of Hungary - thecountry that up to now has received the highest FDI inflows in both GDP and per capita terms-illustrates the role of domestic policies in transforming the opportunity it offered into reality.Kaminski and Riboud (2000) for instance underline that the emphasis that Hungary placed onforeign investors during its privatization process, the significant progress in macroeconomicstabilization, structural reforms and institutional developments have proved essential factors forexplaining the country's outstanding performance in attracting FDI. On the other hand, the poorexperiences in macroeconomic stabilization and structural reforms exhibited by Bulgaria andRomania -- the countries that have received the smallest FDI inflows in per capita terms andsuffered the worst economic performance- somehow support the same diagnosis.

Conversely, if endowments in transport infrastructure or domestic technological capitalhas had a role in explaining differences in growth performance across the ten CEECs, a clearpattern does not emerge from the data (see Table 7). What is clearer is that education levels in

26

Page 35: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

CEECs generally approach EU standards,37 and that if any threshold effect exist in that area (as anecessary condition for convergence), candidate countries should be well position to pass it. Theexperience of cohesion countries suggested that continued efforts in building human capital is anessential for sustaining growth and real convergence.

Table 7: CEECs: Factors Conducive to Real ConvergenceExpenditure for Mean school years in Internet connections Km of motorways in 1999 (2)

R&D in 1996 1998 of the population per 1000 inhabitants Per 1000 km2 of Per 10000(% GDP) (1) 15-64 years (3) in 1999 (2) surface inhabitants

Bulgaria 0.57 8.4 3.2 2.92 3.95Czech Republic 1.11 10.0 19.4 6.31 4.84Estonia 0.57 9.0 18.3 1.91 6.01Hungary 0.68 10.6 13.6 4.45 4.82Latvia 0.48 9.1 3.4 . -

Lithuania 0.70 8.9 - 6.39 11.27Poland 0.77 11.0 2.6 0.86 0.69Romania 0.72 9.1 0.6 0.48 0.50Slovak Republic 1.05 7.7 7.2 6.02 5.47Slovenia 1.46 9.9 9.9 19.68 20.09

European Union 1.80 9.1 44.0 15.36 13.22Source: (1) OECD, (2) European Commission, (3) Author's calculation on the basis of UNESCO, OECD and

EUROSTAT data

Indeed, while some of the CEECs have not yet fully taken advantage of the opportunitiestrade integration with the EU is offering them, the main issue for the most advanced ones is morehow to sustain the incipient convergence towards EU levels of income. As noted above, theexperience of earlier entrants seem to indicate that trade integration may provide only atemporary boost to the countries' growth rate, after which the latter would settle back towardsthe regional average rate, with little further gain in terms of convergence. Taking the CEECs asa whole, Figures 8 and 9 show indeed little convergence of late. Whether and to what extent,this is a reflection of the acceleration of growth within the EU itself during the period, and/or to adrying out of the initial trade liberalization effect, it is probably too early to tell. What theprecedent of the cohesion countries suggests however is that, over the medium term, thecandidates may need to depend, more than anything, on Single Market and Economic andMonetary Union policies to give a second wind to their initial advances towards the higherstandard of living of the EU. Similarly, when it comes to reducing internal regional disparities,the candidates may be wise to put greater store by removing obstacles to labor mobility (e.g.,uniforn minimum wages, rigidities in housing markets), than by EU subsidies.

37 It should be noted, however, that such an indicator of human capital endowments does not take into considerationthe significant differences that seem to exist in the quality of education systems between the CEECs and the currentEU members.

27

Page 36: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed
Page 37: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

5. Concluding Remarks

The theoretical and empirical discussions above seem therefore to yield ,a few generallessons which current candidates may want to incorporate in their accession strategies. Here aresome of the main ones:

(a) Although theory envisages this possibility, there seems to be little reason to fearthat trade integration, per se, would cause economics to diverge. As predicted bystandard models, a main effect of European economic integration has been tofacilitate a diffusion of technologies, as encapsulated by converging capital/laborratios, which in turn has fueled real convergence;

(b) Real convergence is not a foregone conclusion however. Whether it happens or notdepends crucially on a number of other factors. In particular, the experience of thecohesion countries supports the emphasis placed in the recent growth literature onthe crucial role of human capital for achieving real convergence.

(c) Similarly, the experiences of Greece and Ireland provide real-life confirmation thatlittle can compensate for the lack of a stable, growth-promoting environment. Inthat sense, other common European policies, such as the Single Market and theEconomic and Monetary Union, might be just as important as trade in sustainingincome convergence over the long haul.

(d) It is possible for integrating countries to take advantage of internationaltechnological spillovers to overcome "technological backwardness" (in the words ofGershenkron), foreign direct investment being one of the main channel of diffusion.Macroeconomic stability and a good human capital endowment are essential toharness these benefits.

(e) Pending further empirical analysis, candidate countries may be ill advised to putexcessive store by EUJ regional to fuel their convergence. The fact that the topbeneficiary of EU funds, Ireland, also has the most outstanding convergence, shouldnot conceal that Greece, the number two recipient had, until recentLy, much less toshow for it. At a minimum, what this suggests, is that other factors(macroeconomic and institutional framework, competition, labor mobility) will beessential in determining the outcomes (of EU transfers).

In brief, while EU integration can be propitious for income convergence, it is not asubstitute for the domestic policies necessary to achieve the latter.

29

Page 38: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Methodological Appendix

Decomposition of GDP Growth

In this respect, on the basis of a simple arithmetic exercise, it is possible break down the percapita GDP growth of every country into its components. Thus, it is shown that a country's percapita GDP growth hinges on an increase in labor productivity -which in turn can be brokendown into variations in working time and in hourly productivity- and on employment rategrowth.

Decomposition of the per capita GDP (GDPpc):

GDPpc = = L = Lp* ErPop L Pop

where,

GDP: Gross Domestic ProductPop: PopulationL: EmploymentLp: Labor productivityEr: Employment rate

Decomposition of Labor productivity (Lp):

Lp= G = L* hh=Hp* hL L* h

where,

h: Working time (in yearly hours per person)Hp: Hourly productivity

Decomposition of the Employment rate (Er)

Er= L _ L Lf EapPop Lf Eap Pop

where,

Lf: Labor forceEap: Economically active population

30

Page 39: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Measurement of the International Technological Spillovers by Channels

Foreign Capital (TSfc):

n Fc%j Tk1tTSfc E =

j'~GDPit Phk1 t

where,

Fc. Stock of foreign capital in country i from country j. The values of this variable wereobtained from OECD: International Direct Investment Statistics Yearbook. Given the disparitiesfound between data for the source and host countries, the statistics had to undergo a data-editingprocess.

Tk: Stock of technological capital. The data of each country wasestimated on the basis of the accumulation of R&D expenditure underthe perpetual inventory method (with a lag of two years) andassuming a 10% depreciation rate, based on data obtained fromOECD: Main Science and Technology Indicators; Basic Science andTechnology Statistics; and Research and Development Expenditurein Industry.

Phk: Physical capital. The data of each country was estimated on thebasis of the accumulation of investment flows under the perpetualinventory method. The series on the GFCF (Gross Fixed CapitalFormation) and their deflators are those which figure in OECD:National Accounts, Vol. 1, Main Aggregates. The depreciation rate is5,4% and was obtained from EUROSTAT (1997).i and j are referred to the host and the source country of the flows offoreign capital.

n is the number of countries considered. In this case all OECDcountries.

Good Imports (TSm):

n Ml k1TSm,, = iM Tk it

i=' GDP,t GDP1 t

where,

M: Imports of country i from country j. The data on bilateral trade flowswere drawn from the IMF: Direction of Trade Statistics Yearbook. Toovercome the problem of the lack of coincidence between the trade data

31

Page 40: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

from the standpoint of imports (fob) and of exports (fob), thearithmetical mean between both of them was calculated.

Technological imports (TStm):

Mtm iti1(1-S) pit +tm itTStmit = Mtm it Pit -1

GDPit GDPit

where,

Mtm: Accumulated technological imports from 1973, calculated by theperpetual inventory method.

tm: technological imports per year obtained from IMF: Balance ofPayments Statistics Yearbook, EUROSTAT: Balance of Payments.Quarterly Statistics and OECD: Basic Science and TechnologyStatistics.

d: Depreciation rate. In this case the depreciation rate is 10% as inMohnen et al. (1986) and Bernstein and Nadiri (1989).

p: Deflator of Gross Fixed Capital Formation obtained from OECD:National Accounts. Vol. I. Main Aggregates

32

Page 41: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

References

Aghion, P., Caroli, E. and C. Garcia Pefialosa. 1999 "Inequality and economic Cirowth: ThePerspective of the New Growth Theories," Journal of Economic Literature, XXX5VII: 1615-1660.

Aghion, P. and P. Howitt. 1998 Endogenous Growth Theory, The MIT Press, Massachusetts

Alesina, A. and R. Perotti. 1995 "Fiscal Expansions and Adjustments in OECD Countries,"Economic Policy, 21: 205-40.

Alesina, A. and R. Perotti. 1996 "Fiscal Adjustment," Working Paper 96/70, InternationalMonetary Fund, Washington, DC.

Argimon, I., J.M. Gonzalez Paramo, and J.M. Roldan. 1997 "Evidence of Public SpendingCrowding-out from a Panel of OECD Countries," Applied Economics, 29: 100'L-10.

Aschauer, D.A. 1989 "Is Public Expenditure Productive?" Journal of Monetary Economics, 23:177-200.

Aschauer, D.A. 2000 "Public Capital and Economic Growth: Issues of Quantity, Finance, andEfficiency," Economic Development and Cultural Change, 48(2): 391-406.

Atkinson, A.B. 1999 "The distribution of income in the UK and OECD countries in the twentiethcentury," Oxford Review of Economic Policy, 15: 56-75.

Baldwin, R.R.; H. Braconier and R. Forslid. 1999 "Multinationals, endogenous growth andtechnological spillovers: theory and evidence," Working Paper 2155, CEPR, London.

Baldwin, R. and A. Venables. 1995 "Regional Economic Integration," in G. M. Grossman and K.Rogoff (eds.): Handbook of International Economics, vol. 3: 1597-1644, Elsevier,Amsterdam.

Barro, R.J. and J.W. Lee. 1993 "International comparisons of educational attainment," Journal ofMonetary Economics, 32, 363-394.

Barro, R.J. and J.W. Lee. 1996 "International Measures of Schooling Years arid SchoolingQuality," American Economic Review. Papers and Proceedings, 86(2): 218-23.

Barro, R. and X. Sala-i-Martin. 1995 Economic Growth, McGraw-Hill, Inc., USA.

Barry, F. (ed.) 1999 Understanding Ireland's Economic Growth, Macmillan, London.

Baumol, W.; R. Nelson, and E. Wolff. 1994 Convergence of Productivity: Cross-nationalStudies and Historical Evidence, Oxford University Press, Oxford.

33

Page 42: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Ben-David, D. 1993 "Equalizing Exchange Trade Liberalization and Income Convergence,"Quarterly Journal of Economics, 108: 653-79.

Ben-David, D. 2000 "Trade, Growth and Disparity Among Nations," in Trade and Poverty,World Trade Organization, Geneva.

Bernstein, J.I. and M.I. Nadiri. 1989 "Rates of Return on Physical and R&D Capital andStructure of the Production Process: Cross section and Time Series Evidence," in Raj, B.(ed.): Advances in Econometrics and Modeling: 169-187. Kluwer Academic Publishers,London.

Blomstr6m, M. and E. Wolff. 1994 "Multinational Corporations and Productivity Convergencein Mexico," in Baumol, W., Nelson, R. and Wolff, E. (eds.) Convergence of Productivity:Cross-national Studies and Historical Evidence, Oxford University Press, Oxford.

Boldrin, M. and Canova, F. 2000 "Inequality and Convergence: Reconsidering EuropeanRegional Policies," Presentation to the 31St panel Meeting of "Economic Policy," Lisbon.

Boyle, G.E. and T.G. McCarthy. 1997 "A Simple Measure of j-Convergence," Oxford Bulletinof Economics and Statistics, 59(2): 257-264.

Boyle, G.E. and T.G. McCarthy. 1999 "Simple Measures of Convergence in per Capital GDP: aNote on Some Further International Evidence," Applied Economics Letters, 6: 343-347.

Braconier, H. and Sj6holm, F. 1998 "National and International Spillovers form R&D:Comparing a Neoclassical and an Endogenous Growth Approach", WeltwirtschaftlichesArchiv, 134 (4): 638-663.

Bresnaham, T.F. and M. Trajtenberg. 1995 "General Purpose Technologies: Engines of Growth,"Journal of Econometrics, 65: 83-108.

Cannon, E. 2000 "Human capital: level versus growth effects," Oxford Economic Papers 52:670-676.

Coe, D.T. and E. Helpman. 1995 "International R&D Spillovers," European Economic Review,39 (5): 859-887.

Cowell, F. 1999 "Measurement of inequality," in A.B. Atkinson and F. Bourguignon (eds.):Handbook of Income Distribution, North Holland, Amsterdam.

Crandall, R.W. 1997 "Are Telecommunications Facilities 'Infrastructure'? If they are, so what?",Regional Science and Urban Economics, 27: 161-179.

Easterly, W. and S. Rebelo. 1993 "Fiscal Policy and Economic Growth," Journal of MonetaryEconomics, 32: 417-58.

34

Page 43: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Easterly, W. and R. Levine. 2000. "It's not factor accumulation: stylized facts and growthmodels," Mimeo, World Bank, Washington, DC.

European Commission. 1999 Sixth Periodic Report on the Social and Economic Siluation andDevelopment of Regions in the European Union, European Commission, Luxembourg.

European Union Statistical Office 1997 "The Capital Stock in the European Union. StructuralDiagnosis and Analytical Aspects," EUROSTAT, Luxembourg.

European Union Statistical Office 1999 "Purchasing power parities and related economicindicators. Results for 1995 and 1996," EUROSTAT, Luxembourg.

Grossman, G.M. 1996 Economic Growth: Theory and Evidence, vol. I and II, Elgar Cheltenham.

Helpman, E. (ed.) 1998 General Purpose Technologies and Economic Growh, MIT Press,Massachusetts.

Herve, Y: 1999. "EU regional transfers and macroeconomic fiscal reaction in cohesion countries:and empirical analysis," mimeo, presentation at the World Bank, Washington, DC.

Herve, Y and R. Holzmann 1998. "Fiscal Transfers and Economic Convergence in the EU: anAnalysis of Absorption Problems and an Evaluation of the Literature," Nomos Baden-Baden.

Hine, R. 1994 "International Economic Integration," in D. Greenaway and A. Winters (eds.),Surveys in International Trade, Blackwell, Oxford.

Karninski, B. and M. Riboud. 2000 "Foreign Investment and Restructuring. The Evidence fromHungary," Technical Paper 453, World Bank, Washington DC.

Keller, W. 1999 "How trade patterns and technology flows affect productivity growth," WorkingPaper 6990, NBER, Cambridge, Massachusetts.

Koski, H.A. and S.K. Majumdar. 2000 "Convergence in Telecommunications InfrastructureDevelopment in OECD Countries," Information Economics and Policy, 12: 111-131.

Krugman, P. 1991 Geography and Trade, MIT Press, Cambridge, Massachusetts.

Lucas, R.E. 1988 "On the Mechanics of Economic Development," Journal of MonetaryEconomics, 22(1): 3-42.

Mankiw, N.G., D. Romer and D.N. Weil. 1992 "A Contribution to the Empirics of EconomicGrowth," Quarterly Journal of Economics, 107 (2): 407-437.

Martin, C. 2000 The Spanish Economy in the New Europe, Macmillan, UK ancl St. Martin'sPress, USA.

35

Page 44: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Martin, C. and Velazquez, F.J. 2001 "An assessment of real convergence of less developed EUmembers: lessons for the CEEC candidates", Working Paper n. 5, European EconomyGroup (EEG), Universidad Complutense de Madrid.

Martin, C.; Velazquez, F.J. and Crespo 2001 "The role of International Technological Spilloversin the Economic Growth of the OECD Countries", Working Paper n. 6, EuropeanEconomy Group (EEG), Universidad Complutense de Madrid.

Mohnen, P.A.; Nadiri, M.I. and Prucha, I.R. 1986 "R&D, production structure and rates of returnin the U.S., Japanese and Germnan manufacturing sectors," European Economic Review,30: 749-771.

Munnell, A. 1990 "How does public infrastructure affect regional economic performance?" in:Munnell, A. (ed.): Is there a shortfall in public capital investment?, Federal Reserve Bankof Boston, Boston.

Nadiri, M.I. 1993 "Innovations and Technological Spillovers," NBER Working Paper 4423,Cambridge, Massachusetts.

Nadiri, M.I. and S. Kim. 1996 "International R&D Spillovers, Trade and Productivity in MajorOECD Countries," NBER, Working Paper 5801, Cambridge, Massachusetts.

Nelson, R. and E. Phelps. 1966 "Investment in Humans, Technological Diffusion, and EconomicGrowth," American Economic Review, 61: 69-75.

Organization for Economic Cooperation and Development. 1999 OECD Economic Surveys:Ireland, OECD, Paris.

Ottaviano and Puga. 1998 "Agglomeration in the global economy: a survey of the new economicgeography," World Economy, 21.

Panagariya, A. 2000 "Preferential Trade Liberalization: the Traditional Theory and NewDevelopments," in Journal of Economic Literature (June).

Perotti, R. 1996 "Fiscal Consolidation in Europe: Composition Patterns," American EconomicReview, 86(2): 105-10.

Pritchett, L. 1997 "Divergence, Big Time," Journal of Economic Perspectives (U.S.), 11(3): 17.

Quah, D.T. 1993 "Galton's Fallacy and Tests of the Convergence Hypothesis," The ScandinavianJournal of Economics, 95: 427-43.

Quah, D. T. 1995 "Empirics for Economic Growth and Convergence," London School ofEconomics, Economics Department, Mimeo.

36

Page 45: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Quah, D. T. 1996 "Convergence Empirics Across Economies with Some Capita] Mobility,"Journal of Economic Growth, 1(1): 95-124.

Roller, L.H. and L. Waverman. 1994 The impact of telecommunications infrastructure oneconomic growth and development, OECD, Paris.

Romer, P. 1986 "Increasing returns and long run growth," Journal of Political Economy, 94,1002-1037.

Romer, P.M. 1990 "Endogenous Technological Change," Journal of Political Economy, 98: 5-21.

Slesnick, D.T. 1998 "Empirical Approaches to the Measurement of Welfare," Journal ofEconomic Literature, vol. XXXVI: 2108-2165.

Solow, R.M. 1956 "A Contribution to the Theory of Economic Growth," Quarterly Journal ofEconomics, 70(1): 65-94.

Temple, J. 1999 "The New Growth Evidence," Journal of Economic Literature, XXXVII: 112-156.

Viner, J. 1950 The Customs Union Issue. Carnegie Endowment for International Peace, NewYork.

World Bank 2000 Progress toward the Unification of Europe, World Bank, Washington, DC.

37

Page 46: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Distributors of World Bank Group Publications

Prices and credit terms vary from CZECH REPUBUC INDIA Eulyno Publishing Co.. Ltd. PERU SWEDENcountry to courey. Consutyr USIS, NIS Prodejna Allied Publishers Ltd. 46-1 Susong-Dong Editorial Desarrollo SA Wennergren-Williams ABlocal distributor before placing an Havelkova 22 751 Mount Road Jongro-Gu Apartado 3824, Ica 242 OF 106 P . Box 1305order 13000Prague3 Madras-600002 Seoul Lima 1 S-171 25 Solna

Tel: (420 2) 2423 1486 Tel: (91 44) 852-3938 Tel: (82 2) 734-3515 Tel: (51 14) 285380 Tel (46 8) 705-97-50ARGENTINA Fax: (420 2) 24231114 Fax: (91 44) 852-0649 Fax: (82 2) 732-9154 Fax: (51 14) 286628 Fax: (46 8) 27-00-71World Publications SA URL: http:llwwwois.cui INDONESIA LEANON PHIUPPINES E-mail: mailwwi.seA Cordoba 877 DENARK Pt. lndira Limited Libraine du Liban international Bnoksource Center Inc. SWITZERLAND

112 Cidad de Boomos Aires SrrudLteaxTel: (5411u) 4815-8156 SamfundsLiteratur Jalan Borobudur 20 P0. Box 11-9232 1127-A Antipolo St, Barangay, Librairie Payot Service InstitutionnelFax: (54 11) 4815-8156 RosenoemsAlle 11 P.O. Box 181 Beirut Venezuela C(tm)tes-de-Montbenon 30E-mail: wpoksn8 oia.corn.r DK-1970 Frederiksberg C Jakarta 10320 Tel: (961 9)217944 MakatiCity 1002 Lausanne

Tel: (45 35) 351942 Tel: (62 21) 390-4290 Fax: (961 9) 217 434 Tel: (63 2) 896 6501 6505:6507 Tel: (41 21) 341-3229AUSTRALIA, FIJI, PAPUA NEW Fax: (45 35) 357822 Fax: (62 21) 390-4289 E-mail: hsayegh@librairie-du- Fax: (63 2) 89861741 Fax: (41 21) 341-3235GUINEA, SOLOMON ISLANDS, URL: http-)ww.sl.cbs.dk IRAN liban.com.PCVANUATU, AND SAeiOAs ECUADOR Ketab Sara Co. Publishers URL: bhnp:twwwIibraine-du- Intemational Publishing Service EdEtionsTechniques648 Vhfixeho Rvad Libri Mundi Khaled Eslamboli Ave., 6th Street liban.com.lb Ul. Piekna 31137 Ch. de Lacuez 41Mtchant 3132, Rictoria Libreria lntemacional Delafrooz A1ll No. 8 MALAYSIA 00-677 Warzawa CH1807 BlonayTel: (61) 392107777 P.O. Box 17-01-3029 P.O. Box 15745-733 University of Malaya Cooperative Tel: (482) 628-6089 Tel: (41 21) 943 2673Fax: (61) 3 9210 7788 Juan Leon Mera 851 Tehran 15117 Bookshop, Limded Fax: (48 2) 621-7255 Fax: (41 21) 943 3605F-axl: (61)39210da7788tcom 0uuit Tel: (96 21) 8717819: 8718104 P.O. Boo 1127 0-mail- books%[email protected] THAILAND

E-mail: servicewdadirectcom.au Tel- (593 2) 521-608: (593 2) 544- Fan: (98 21) 8712479 Jalan Pontxi Baru URL Central Books DistributionURL: http://m.dxdirect.comau 185 E-mail: ketab-saraOneda.net.ir 59700 Kuala Lampor http://www.ipscg.waw.pY1ips/export 306 Sim Roadisite

AUSTRIA Fax: (593 2) 504-209 KelaPuisrsTel. (80 3) 756-5000ORUA Bnkk 00Gerold and Co. E-mail: libriroul@likrimxndicorn,ec P0Bx15551Fan: (68 3) 755-4424 Livroria Portugal Tel: )66 2) 2336930-9

Wethburggasse 26 E-mail: libriomu2ilibrimundi.comnec PTO Box 1957-Si1 E-mail: unkoopilitm.net.my Apartado 2688. Rua Do Carm Fx. (68 2) 237-8321

Tel e(4 1524-10CODEU Tel: (98 21) 258-3723 MEXUCO o 70-74 TRINIDAD & TOBAGOTeF: (43 1) 512-47-31-02 Ruiz de Castilla 763, Edif. Expocolor Fax: (98 21) 258-3723 INFOTEC 1200 Lisbon AND h CRBANURL: bttp://mw.geroId.co/at.online Primer pine, Of. 42 IRELAND As. San Fernando No. 37 Tel: (1) 347-4982 SseaisSuisLdQuito Col. Toriello Guerra Fox: (1) 347-0284 SsoaisSuisLdBANGLADESH Teo/Fax: (593 2) 507-383: 253-091 Government Supplies Agency 1 0 i DSt. Augustine Shopping CenterMicro Industries Dexelopmenet E-mail: codeucimpsat.nei.e Oifhg ax tSxlathair 145 eio .. EsenMi od t uutnAssistance Society (MIDAS) ~~~~4-5 Harcourt Road Tel: (52 5) 624-2600 EaTernMini Road ,Stbag . AugstIninesAsistacse SiRtoad (DAS) EGYPT, ARAB REPUBUC OF Dublno 2 Fax: (52 5) 624-2822 ROMANIA TerI (868& 645 8466Dhnmoosed5 RoAdr16 Al Ahram Distriion Ageecy Tel: (353 1) 661v31 11 E-mail: [email protected] Compani Do Librarli Bucuresti S.A. Fox: (868) 845-8467Dhanmoodi R0 Area Al Galaa Street Fax: (353 1) 475-2670 URL: http:/Inrn.net.mx Str. Lipscani no. 28, sector 3 E-mail: tobe('trinidad.net

OSaka 1209 ~~~~~~~~Cairo ISRAEL Mundi-Prensa Mexico S.A. de C.V. BucharestTel- (880 2) 322421 Tel: (20 2) 578-6083 Yozmot Literature Ltd. cGRio Panuco 141-Colonia Tel 3 GANdA

Fan: (8802)811188 ~~~~Fax: (20 2( 578-6833 P0 o 85 otmcFoxi (40 1)31 2 4000 Gustro Ltd.BeaDeLanIU y The Middle East Observer 3 Yohanax Hasandlar Street 08500 Mexico, O.F. RUSSIAN FEDERATION P0lox 996 7, MinaRd.vvuidnJEa de L aoi y 4 1, Sherif Street Tel Aviv 61560 Tel: (52 5) 533-5858 Isdatelstvo DVes Mir o ja Rd

Au. dx Rol 202 ~~~~~Cairo Tel: (972 3) 5285-397 Faa: (52 5) 514-8799 9a, Koipachni Pereolok Kamr'laTe10 (32 2) 538-5169 Tel: (20 2) 393-9732 Fax: (972 3) 5285-397 NEPAL Te (7 w095) 917 87 49 Fax: (256 41) 251 468Fax: (32 2) 538-0841 Fax: (20 2) 393-9732 RO.Y. Internationat Everest Media international Services Fax: (7 005) 91792 59 E-mail: [email protected]

BRAZIL ~~~~~~~~~~FINLAND PD Bxx 13058 (P Ltd. :V05 1 25BRAZIL ~ ~ ~ iaeemo Kraaup elAi 610GPO Box 5443 ozimannrImeflset.ru UNITED KINGDOM

Publicacoes Tecnicas Internacionais Aktoeminen Kirjakauppa Tel Aviv96 4930 Kathmandu SINGAPORE TAIWAN, CHINA Microinfo Ltd.L0d1.s P.O-Bx121 HiF: (972 3) 648 8039 Tel: (977 1) 418 028 MYANMAR; BRLINEI P0 Box 3, Ome.a Park, Afton,

Rua PeixotoEGomide, 289 Tell: r xo2 Fe (7)2319here Publication Services Hhire G f 2cG01409eaou Paublsh'nCo,P. Tel: 4 358, re 12 L c Fmax: (972 2) 6271634 Fax: (31 53)41 Kallano Podding Road S04-03 EnglandTel: (a1n) a5u-6644 Fax: (358 0) 121-4435 URL: tp:/wwwbryit.c.iI NETHERLANDS Golden eel Building a: (441 ) 8Fax: (SS 11) 258-6890 E-mail: akatilaussckmann1 Palestinian Author%Middle East De Liodeboom/Internatioxale Singapore 349316 L (44 1420) 89889E-mail: postmastere ti.uol.Er URL: ht5p-JFwwezakateeminen.com lIter I ervices Pblicaties b.v.- Tel: (865741-51668 -mail: [email protected]:http:llwww.uolr FRANCE P0.6B. 19502 Jerusalem P0, Box 202. 7480 AE -eaaisbergen Fax: (5) 742-9358 URL: http://ni micronino.co.ukCANADA Editions Eskal D8J Tel: (972 2) 8271219 Tel: (31 53) 574-0004 E-mail: [email protected] The Stationery OfficeReouf bshng 48 rue Gay Lssac Fax: (972 2) 271634 Fox: (31 53) 572-9296 SLOVENIA Pt Nixe El ms Lane

Publisnhin Coad Ltd05 Paris ITALY,ingsERIA E-mail: firidebooVworldonline ni London SZM SOROttawa, Ontario KlJ 9.13 Tel: (33-1) 55-42-73-08 Licosa Commissixonaria Saxsonni SPA URL: http:/twww.worldonline.n8-lin- Gospodarski vestoik Publishing Tel: (44 171) 873-8400Tel: (613) 745-2686P Via uca Di Calabria. 1/1 deboo Dunajska cesta Fax:L8 (44 171) 87-i8o stonier2iyFax: (613) 745-7860 GERMANY Casella Postale 552 NEW ZEALAND 100Do LZjoh URL.caobia/E-mail: UN0-Verlag 50125 Firenze EBSCO NZ Ltd. Tel: (38 81) (133834 474 20 Gfre3c Eak 2

order.depteirenoxfitooks.com Poppelsdorfer Allee 55 Tel: (39 55) 645-415 Prvt alBg994Fan: (386 61( 133 8030 VENEZUELAURL: httpBox w22 renonfbooks.com 53115 Been FaxP (39 55) 641-257 Neawe Maiegr E-mail: [email protected] Tecni-Ciencia Librs. S.A.

CHINAfTel: (49 228) 949020 0-mail: licosael tbcc.it New MauklA Centro Cuidad Comercial Tamancofax: (861 667i494Fax: (49 228) 217492 URL: hitp:/lwww.ftbcc.itilicosa AuTelan(4 O5241 single ttleWs: N Nivel C2c CaracasChinx Financial & Economic URThtiwwoxvra.e JMIAFel: (64 9) 524-8007 OFord Uinivertsy PrssSothrn F (58 2) 959 564:536~ (1Publishing House TFax: (64 9) 541-0567 F: 2) 959 55035

B. Da Fo Si uong 2ie E-mail: [email protected] Inn RandSle Publishers Ltd. APtica L0.Boon GHANA 208 Old Hone Road, Kingston 6 Oasis Official Vasco Boulevard, Goo7wood ZAMBIATei: (86 10a 6401-7365 E Books Services Tel- 876-927-2085 P0O. Box 3627 PO, Bun 12119,1I City 7483 University Bookshop, University ofFan: (86 10) 6401-7365 PI5 Box 44 Fax: 876-977-0243 Welfina4on Cape Town ZambiaChinax (571) 285-2798 Fax: (502TUC E-mail: [email protected] Tel: (64 4) 499 1551 Tel: (27 21) 595 4400 Great East Road CampusPC. Boa 2825 Tel:a 2232177884 JAPAN Fax: (4 44) 4991972 Fan- (27 21) 595 4430 P.O. Be 32179Beoing Fao: 223 21 779099 Eastern Book Service E-mail: [email protected] h-mail: oxford@en up.c.za Lusaka

Fax: (CEOA) 302 1 Seabird House Mezzangoine chomeBuURL: ht1p:a wwwe oasisbooks.cn.nz/ For subscripeion orders:

f HPomantie r GREECE Tokyo 116 NIGERIA International Subscription Service Fan: (260 1)753 9522 Youman H TT Papasotiriou S.A. Tel: (81 3) 3818-0861 University Press Limited P.O. Box 41095 ZIMBABWE

Fuax Fane Hu Jor Fx 35, Stoumara Str. Fax: (81 3) 3818-0864 Three Crowns Buildig Craghall Academic and Baobab Books (Pt.)CYPRUa NeiaDl:Jie106 82 Athens E-mail: ordersgfsvm-ebs.comjp PE mail. eag 5 ic095 Johannesburg 2024 Ltd.

Begin ge no1UNAl aan 0k ldn o Priate Mail Copoatio 10.Si0httmalm95r

Tel: (35 20) 6607230 Tel: (30 1) 364-1826 URL3 lbadan Tel (27 11) 880-1448 4 Conald Road. GranitesideFax: (8 10) 66072494 Fax: (30 1364-8254 http0:/Avwwbekkoame.rjp-svt- Tel: pbc@br tFo (27 11) 880-6248 P.O. Boo 567

F ( )aiTl:s 56 E-mail. [email protected] HarareCOLOMBIA HAITI Faa: (234 22) 41-2056 Tel: 263 4 155036Infoernlace LIda. Cuature Diffusion KENYA SPAINFa2647893Carrera 69No. 51-21 5. Rue Capois Africa Book Service (E.A.( Ltd, PAKISTAN Mundi-Prensa Libros. S.A.Fo:73813Apartado Aereo 34270 C.P. 257 Quarax House. Mfangano Street Mirza Book Agency Castello 37

Sarvtae de ogota D.C.Port-au-Prince P.O. Boo 45245 65. Shahrah-e-Qxaid-e-Azam 28001 MadridaTafit do7 Bogota5 D.C. Tel: (609) 23 9260 Nairobi Lahore 54000 Tel: (34 91) 4 363700

Tel: (57 1) 285-2798 Fan: (509) 23 4858 Tel: (254 2) 223 641 Tel: (92 42) 735 38601 Fan- (34 91) 5753998

COTE DIVOIRE ~~~~~~~HONG KONG, CHINA MACAD Fan: (254 2) 330 272 Foe: (92 42) 576 3714 E-mail: [email protected] d'Edition et do Diffusion Asia 3800 Ltd. Legac Books Oxford University Press Mundi-Preusa Barcelona

Africaines (CEDA) Sales & Circulation Department Loia I-oose BaglrTonCse dCnt3904 B.P. 541 ~~302 Seabird lease Mezzanine 1 5hra Bangalor TownC BarselldoCnta9

04bidja 641 22-28 Wyndham Street. Central P.O. Box 68077 POara Fixsa03 08009 B34rce48o349Teidja 025 461:24 61 oTe K nx China Nairobi FOBactx 135033x 3 3 845Tel: (225) 246051826511 Tel: ?B502) 1S30-1409 Tel: (254) 2-330853, 221426 Kelrac2i-7543507 TEmal: (343) 488a-3492 prns.e

Fan: (225) 250667 ~~~Fan: (852) 2526-1107 Fan: (254) 2-330854, 561654 Tel: (92 21) 45476307 -al acboemnirnoCYPRUS E-mail: [email protected] E-mail: [email protected] F-an.i (92 a 21) 4547640I ANA,TH MLVECenter for Applied Research URL: http-J/www.asia2000.com.hk KOREA. REPUBLIC OF-al opskTeOtc.e SRIe LAouse, BokhE opDt

Engrmi CleeHNGARY Oayang Books Trading Cx. Pak Book Corporation 100. Sir Chittampalam Gardiner6. Digeris SVet, Egomi Euro Info Service international Division Azuz Chambers 21, Queen's Road MawathaPDO. Box 2008 Ma etooei Europa Haz 783-20, Pangha Bon-Dong. Lahore Colombo 2

Nioi H1f30 daps Socho-ku Tel: (92 42) 636 3222: 636 0865 Tel: (94 1(32105Fel. (357 2) 59-20730 Tel: (30 1) 350 80 24.350 8025 Seoul Fax: (92 42) 636 2328 Fax: (94 1) 432104

Fax: (357 2) 66-2051 ~~Fax: (36 1) 350 90 32 Tel: (82 2) 536-9555 E-mail: [email protected] E-mail: [email protected]: [email protected] Fan: (82 2) 536-0025

E-mail: [email protected]

Page 47: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

Recent World Bank Technical Papers (continued)

No. 463 Stephen Foster, John Chilton, Marcus Moench, Franklin Cardy, and Manuel Schiffler, Grouendwater inRural Development: Facing the Challenges of Supply and Resource Sustainability

No. 465 Csaba Csaki and Zvi Lerman, eds., Structural Change in the Farming Sectors in Central and Eastern Europe:Lessonsfor EU Accession-Second World Bank! FAO Workshop, June 27-29, 1999

No. 466 Barbara Nunberg, Readyfor Europe: Public Administration Reform and European Union Accession in Centraland Eastern Europe

No. 467 Quentin T. Wodon with contributions from Robert Ayres, Matias Barenstein, Norman Hicks, Kihoon Lee,William Maloney, Pia Peeters, Corinne Siaens, and Shlomo Yitzhaki, Poverty and Policy in Latin Americaand the Caribbean

No. 469 Laurian Unnevehr and Nancy Hirschhom, Food Safety Issues in the Developing World

No. 470 Alberto Valdes, ed., Agricultural Support Policies in Transition Economies

No. 471 Brian Pinto, Vladimir Drebentsov, and Alexander Morozov, Dismantling Russia's Nonpayments System:Creating Conditions for Growth

No. 472 Jit B. S. Gill, A Diagnostic Frameworkfor Revenue Administration

No. 473 Esen Ulgenerk and Leila Zlaoui, From Transition to Accession: Developing Stable and Competitive FinancialMarkets in Bulgaria

No. 474 loannis N. Kessides, ed., Hungary: A Regulatory and Structural Review of Selected Infrastructure Sectors

No. 475 Csaba Csaki, Zvi Lerman, and Sergey Sotnikov, Farm Sector Restrtcturing in Belarus: Progress andConstraints

No. 476 Katherine Terrell, Czech Republic: Labor Market Report

No. 481 Csaba Csaki, John Nash, Achim Fock, and Holger Kray, Food and Agriculture in Bulgaria: The Challenge ofPreparingfor EU Accession

No. 482 Peter Havlik, Trade and Cost Competitiveness in the Czech Republic, Hungary, Poland, and Slovenia

No. 483 Mojmir Mrak, Communal Infrastructure in Slovenia: Survey of Investment Needs and Policies Aimed atEncouraging Private Sector Participation

No. 484 Csaba Csaki and Laura Tuck, Rural Development Strategy: Eastern Europe and Central Asia

No. 488 Nina Bubnova, Governance Impact on Private Investment

No. 489 Tim Schwarz and David Satola, Telecommunications Legislation in Transitional and Developing Economies

No. 490 Jesko Hentschel and Radha Seshagiri, The City Poverty Assessment: A Primer

No. 491 Daniel Muller-Jentsch, The Devlopment of Electricity Markets in the Euro-Mediterranean Area

No. 492 Tuntivate Voravate, Douglas F. Barnes, and V. Susan Bogach, Assessing Markets for Renewable E'nergy inRural Areas of Northwestern China

No. 496 Jerry Lebo and Dieter Schelling, Design and Appraisal of Rural Transport Infrastructure: Ensturing Basic Accessfor Rural Communities

No. 497 Julian A. Lampietti, Anthony A. Kolb, Sumila Gulyani, and Vahram Avenesyan, Utility Pricing and Poor:Lessonsfrom Armenia

No. 498 Gillian Perkins and Ruslan Yemtsov, Armenia: Restructuring to Sustain Universal General Education

No. 499 Rogrigo A. Chaves, Susana Sanchez, Saul Schor, and Emil Tesliuc, Financial Markets, Credit Constraints,and Investment in Rtural Romania

No. 500 Zvi Lerman and Karen Brooks, Turkmenistan: An Assessment of Leasehold-Based Farm Restrtncturing

No. 501 Aldo Baietti, Private Infrastntctutre in East Asia: Lessons Learned in the Aftermath of the Crisis

No. 505 Ali Hashim and Bill Allan, Treasury Reference Model

No. 506 Omer Gokcekus, Nick Manning, Ranjana Mukherjee, and Raj Nallari, Instituttional Environment and PublicOfficials' Performance in Guyana

No. 507 Ranjana Mukherjee, Omer Gokcekus, Nick Manning, and Pierre Landell-Mills, Bangladesh: The Experienceand Perceptions of Public Officials

No. 509 World Bank, Kosovo: Economic and Social Reformsfor Peace and Reconciliation

No. 510 Anatoly Vinokur, Joana Godinho, Christopher Dye, Nico Nagelkerke, The TB and HIV/AIDS Epidemics inthe Russian Federation

No. 512 Geremia Palomba, Milan Vodopivec, Financing, Efficiency, and Equity in Albanian Edtuction

No. 513 Thomas O'Brien, Christian Filipov, The Current Regulatory Framework Governing Business in Bi lgaria

Page 48: for August 2001 European Integration and Income Convergence€¦ · Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed

0THE WORLD BANK

1818 H Street, .N .

NWashington, D.C. 20433 USA

Trelephone: 202-477-1234

Facsimile: 202-477-6391

Internet: vwwx.Norldbank.org

E-mail: feedhack(ca worldbank.org

ISBN 0-8213-4994-5