Does European economic integration create more inequality between domestic regions, or is the opposite true? We show that a general answer to this question does not exist, and that the outcome depends on the liberalisation scenario. In order to examine the impact of European and international integration on the regions, the paper develops a numerical simulation model with nine countries and 90 regions. Eastward extension of European integration is beneficial for old as well as new member countries, but within countries the impact varies across regions. Reduction in distance-related trade costs is particularly good for the European peripheries. Each liberalisation scenario has a distinct impact on the spatial income distribution, and there is no general rule telling that integration causes more or less agglomeration.
Authored by Arne Melchior
Published in 2009
Implementation of the European internal market and East-West integration has been accompanied by dramatic change in the spatial distribution of economic activity, with higher growth west and east of a longitude degree through Germany and Italy. In the east, income growth has been accompanied by increasing regional disparities within countries. We examine theoretically and empirically whether European integration as such can explain these developments. Using a numerical simulation model with 9 countries and 90 regions, theoretical predictions are derived about how various patterns of integration may affect the income distribution. Comparing with reality, we find that a reduction in distance-related trade costs combined with east-west integration is best able to explain the actual changes in Europe's economic geography. This suggests that the implementation of the European internal market or the Euro has "made Europe smaller". In Central Europe, capital regions grow faster and there are few east-west growth differences inside countries. There is no convincing support for the hypothesis that European integration had adverse effects on non-members.
Authored by: Arne Melchior
Published in 2009
This working document offers a conceptual framework for understanding the processes underpinning the external dimension of EU Justice and Home Affairs (ED-JHA). Practically, it defines how the export of JHA principles and norms inform the geopolitical ambitions of the EU, i.e. the use of space for political purposes, or the control and management of people, objects and movement. The author begins by investigating how the ENP reconfigures the ED-JHA, and then goes on to discuss various conceptual stances on governance, specifically institutionalism, constructivism, and policy instruments. To conclude he traces the evolution of this external dimension, emphasising, whenever possible, its continuities and bifurcations. Overall, the aim is to ascertain the extent to which conceptual designs clarify or advance our knowledge of the contents and rationales of the ED-JHA.
Authored by: Thierry Balzacq
Published in 2008
In this paper the authors undertake an ex-post evaluation of whether the special economic zones (SEZs) introduced in Poland in 1994 have been successful in meeting regional development objectives. They evaluate the policy of as many of its objectives as possible: employment creation, business creation (which includes attracting foreign direct investment), income or wage effects, and environmental sustainability. They use different panel data methods to investigate this question at the powiat and gmina levels in Poland during the 1995-2011 period. It is also possible to include numerous controls to reduce the problem of the omitted variables bias such as education level, dependency rates, state ownership, general subsidies and whether the area is urban or rural. The results indicate that SEZs in Poland have been successful in a number of their objectives such as private business creation. The positive effect of the policy however mainly comes through foreign direct investment (FDI), whereas the effects on e.g. investment and employment are small or insignificant. In other areas, such as securing higher income levels and locking firms into the sustainability agenda through the adoption of green technologies and reduced air pollution, the authors find only a small positively moderating effect of the policy on what are traditionally economically disadvantaged areas in Poland that used to be dependent on the socialist production model. Hence, despite high levels of FDI, the zones policy has not managed to overcome the legacy of backwardness or lagging regions. The main policy implication of the paper is that SEZs may be successful in stimulating activity in the short run but the policy must be seen as one of necessary temporality and can therefore not stand alone. Before launching SEZs, policymakers must have plans in place for follow up measures to ensure the longer term competitiveness and sustainability implications of such an initiative. There is a need to understand the connection between the specific incentive schemes used (in this particular case tax incentives were used) and the kinds of firms and activities they attract, including the behavioral models that those incentives promote.
Authored by: Camilla Jensen
Published in 2014
The empirical analysis of the determinants of institutional development in transition countries as well as the qualitative country studies summarized in this publication allow for some optimism concerning a potential impact of the EU on institution building and governance quality in CIS countries. Regression analysis reveals a positive impact of EU cooperation agreements below a membership perspective. Alternatively to the EU, entry into the NATO accession process also exerts incentives for better institutions which are often overlooked. In contrast, WTO membership is not found to have any impact on institution building in CIS countries. While there is room for some EU-related optimism given the results from the regression analysis it depends on the country-specific ENP action plans and programs whether or not ENP cooperation actually leads to Europeanization or institutional convergence towards EU standards in the CIS. The case studies on the effectiveness of Neighborhood Europeanization through ENP in Ukraine, Georgia, and Azerbaijan reveal that current EU policies towards these countries can be, at best, seen as a catalyst but not as a main driver of institutional convergence. A perspective for a stake in the internal market is on the long horizon for Ukraine only. ENP mechanisms for conflict resolution in Georgia and Azerbaijan have been rather weak before the recent clash in Abkhazia and South Ossetia. The top-down institutional convergence, i.e. an EU-first strategy, worked well for Enlargement Europeanization but implemented in the ENP it significantly reduces the leverage of the EU to create a ring of well-governed neighbour states.
Authored by: Thorsten Drautzburg, Andrea Gawrich, Inna Melnykovska, Rainer Schweickert
Published in 2008
This paper studies costs and benefits of institutional harmonisation in the context of EU relations with its neighbors. The purpose of this paper is to outline the likely forms of institutional harmonisation between the EU and its Eastern neighbors and provide an
overview of the methodologies that can be used in measuring its effects (costs and benefits). This paper serves as a background for two measurement exercises – one on benefits and another on costs – that are to be undertaken during the second stage of research.
Authored by: Veliko Dimitrov, Vladimir Dubrovskiy, Anna Kolesnichenko, Irina Orlova
Published in 2007
This paper examines the motives behind foreign direct investment (FDI) in a group of four CIS countries (Ukraine, Moldova, Georgia and Kyrgyzstan) based on a survey of 120 enterprises. The results indicate that non-oil multi-national enterprises (MNEs) are predominantly oriented at serving local markets. Most MNEs in the CIS operate as 'isolated players', maintaining strong links to their parent companies, while minimally cooperating with local CIS firms. The surveyed firms secure the majority of supplies from international sources. For this reason, the possibility for spillovers arising from cooperation with foreign-owned firms in the CIS is rather low at this time. The lack of efficiency-seeking investment poses further concern regarding the nature of FDI in the region. The most significant problems identified in the daily operations of the surveyed foreign firms are: the volatility of the political and economic environment, the ambiguity of the legal system and the high levels of corruption.
Authored by: Malgorzata Jakubiak
Published in 2008
This paper analyzes the costs of (partial) institutional harmonization with the EU acquis which countries of the former USSR are expected to conduct under their Partnership and Cooperation Agreements with the EU and European Neighborhood Policy Action Plans. The public sector will have to take an effort of the transposition and adaptation of EU norms, as well as ensuring that they are complied with. Yet, the major part of the adjustment costs will fall on the private sector, as enterprises will have to make substantial investments to comply with new product requirements and business practices.
In this study we used the method of extrapolation of average costs for CEE countries’ harmonization with acquis to estimate the potential harmonization costs for the neighboring countries based on internationally comparative macroeconomic indicators like sectoral and total value added. This involved estimating the EU pre-accession support for the CEE countries by main areas as a percentage of the total or sectoral value added, determining the expected degree of limited harmonization in the ENP countries and estimating “coefficients of limited harmonization”, which was subsequently used for adjustment of the estimated cost of full harmonization.
Authored by: Veliko Dmitrov
This paper employs a standard Tobin-Markowitz framework to analyse the determinants of capital flows into the CIS countries. Using data from 1996-2006, we find that the Russian financial crisis of 1998 has had a profound impact on capital flows into the CIS (both directly and indirectly). Firstly, it introduced a structural shift in the investors' behaviour by shifting the focus from the external factors to the internal ones, e.g. domestic interest and GDP growth rates. Secondly, it also drastically changed the impact of a number of explanatory variables on capital flows into the CIS. Political risk was found to be the second most important determinant of capital flows into the CIS. Additionally, we report some strong evidence of co-movement between portfolio flows into the CIS and CEEC, coupled with strong complementarity between global stock market activity and portfolio inflows into the CIS. Interestingly, external factors tend to be of a higher significance than internal factors for the largest members (Russia, Ukraine and Kazakhstan) of the CIS; whereas domestic variables tend to have a greater impact on the capital flows into the smaller CIS countries.
Authored by: Oleksandr Lozovyi
Published in 2007
Implementation of the European internal market and East-West integration has been accompanied by dramatic change in the spatial distribution of economic activity, with higher growth west and east of a longitude degree through Germany and Italy. In the east, income growth has been accompanied by increasing regional disparities within countries. We examine theoretically and empirically whether European integration as such can explain these developments. Using a numerical simulation model with 9 countries and 90 regions, theoretical predictions are derived about how various patterns of integration may affect the income distribution. Comparing with reality, we find that a reduction in distance-related trade costs combined with east-west integration is best able to explain the actual changes in Europe's economic geography. This suggests that the implementation of the European internal market or the Euro has "made Europe smaller". In Central Europe, capital regions grow faster and there are few east-west growth differences inside countries. There is no convincing support for the hypothesis that European integration had adverse effects on non-members.
Authored by: Arne Melchior
Published in 2009
This working document offers a conceptual framework for understanding the processes underpinning the external dimension of EU Justice and Home Affairs (ED-JHA). Practically, it defines how the export of JHA principles and norms inform the geopolitical ambitions of the EU, i.e. the use of space for political purposes, or the control and management of people, objects and movement. The author begins by investigating how the ENP reconfigures the ED-JHA, and then goes on to discuss various conceptual stances on governance, specifically institutionalism, constructivism, and policy instruments. To conclude he traces the evolution of this external dimension, emphasising, whenever possible, its continuities and bifurcations. Overall, the aim is to ascertain the extent to which conceptual designs clarify or advance our knowledge of the contents and rationales of the ED-JHA.
Authored by: Thierry Balzacq
Published in 2008
In this paper the authors undertake an ex-post evaluation of whether the special economic zones (SEZs) introduced in Poland in 1994 have been successful in meeting regional development objectives. They evaluate the policy of as many of its objectives as possible: employment creation, business creation (which includes attracting foreign direct investment), income or wage effects, and environmental sustainability. They use different panel data methods to investigate this question at the powiat and gmina levels in Poland during the 1995-2011 period. It is also possible to include numerous controls to reduce the problem of the omitted variables bias such as education level, dependency rates, state ownership, general subsidies and whether the area is urban or rural. The results indicate that SEZs in Poland have been successful in a number of their objectives such as private business creation. The positive effect of the policy however mainly comes through foreign direct investment (FDI), whereas the effects on e.g. investment and employment are small or insignificant. In other areas, such as securing higher income levels and locking firms into the sustainability agenda through the adoption of green technologies and reduced air pollution, the authors find only a small positively moderating effect of the policy on what are traditionally economically disadvantaged areas in Poland that used to be dependent on the socialist production model. Hence, despite high levels of FDI, the zones policy has not managed to overcome the legacy of backwardness or lagging regions. The main policy implication of the paper is that SEZs may be successful in stimulating activity in the short run but the policy must be seen as one of necessary temporality and can therefore not stand alone. Before launching SEZs, policymakers must have plans in place for follow up measures to ensure the longer term competitiveness and sustainability implications of such an initiative. There is a need to understand the connection between the specific incentive schemes used (in this particular case tax incentives were used) and the kinds of firms and activities they attract, including the behavioral models that those incentives promote.
Authored by: Camilla Jensen
Published in 2014
The empirical analysis of the determinants of institutional development in transition countries as well as the qualitative country studies summarized in this publication allow for some optimism concerning a potential impact of the EU on institution building and governance quality in CIS countries. Regression analysis reveals a positive impact of EU cooperation agreements below a membership perspective. Alternatively to the EU, entry into the NATO accession process also exerts incentives for better institutions which are often overlooked. In contrast, WTO membership is not found to have any impact on institution building in CIS countries. While there is room for some EU-related optimism given the results from the regression analysis it depends on the country-specific ENP action plans and programs whether or not ENP cooperation actually leads to Europeanization or institutional convergence towards EU standards in the CIS. The case studies on the effectiveness of Neighborhood Europeanization through ENP in Ukraine, Georgia, and Azerbaijan reveal that current EU policies towards these countries can be, at best, seen as a catalyst but not as a main driver of institutional convergence. A perspective for a stake in the internal market is on the long horizon for Ukraine only. ENP mechanisms for conflict resolution in Georgia and Azerbaijan have been rather weak before the recent clash in Abkhazia and South Ossetia. The top-down institutional convergence, i.e. an EU-first strategy, worked well for Enlargement Europeanization but implemented in the ENP it significantly reduces the leverage of the EU to create a ring of well-governed neighbour states.
Authored by: Thorsten Drautzburg, Andrea Gawrich, Inna Melnykovska, Rainer Schweickert
Published in 2008
This paper studies costs and benefits of institutional harmonisation in the context of EU relations with its neighbors. The purpose of this paper is to outline the likely forms of institutional harmonisation between the EU and its Eastern neighbors and provide an
overview of the methodologies that can be used in measuring its effects (costs and benefits). This paper serves as a background for two measurement exercises – one on benefits and another on costs – that are to be undertaken during the second stage of research.
Authored by: Veliko Dimitrov, Vladimir Dubrovskiy, Anna Kolesnichenko, Irina Orlova
Published in 2007
This paper examines the motives behind foreign direct investment (FDI) in a group of four CIS countries (Ukraine, Moldova, Georgia and Kyrgyzstan) based on a survey of 120 enterprises. The results indicate that non-oil multi-national enterprises (MNEs) are predominantly oriented at serving local markets. Most MNEs in the CIS operate as 'isolated players', maintaining strong links to their parent companies, while minimally cooperating with local CIS firms. The surveyed firms secure the majority of supplies from international sources. For this reason, the possibility for spillovers arising from cooperation with foreign-owned firms in the CIS is rather low at this time. The lack of efficiency-seeking investment poses further concern regarding the nature of FDI in the region. The most significant problems identified in the daily operations of the surveyed foreign firms are: the volatility of the political and economic environment, the ambiguity of the legal system and the high levels of corruption.
Authored by: Malgorzata Jakubiak
Published in 2008
This paper analyzes the costs of (partial) institutional harmonization with the EU acquis which countries of the former USSR are expected to conduct under their Partnership and Cooperation Agreements with the EU and European Neighborhood Policy Action Plans. The public sector will have to take an effort of the transposition and adaptation of EU norms, as well as ensuring that they are complied with. Yet, the major part of the adjustment costs will fall on the private sector, as enterprises will have to make substantial investments to comply with new product requirements and business practices.
In this study we used the method of extrapolation of average costs for CEE countries’ harmonization with acquis to estimate the potential harmonization costs for the neighboring countries based on internationally comparative macroeconomic indicators like sectoral and total value added. This involved estimating the EU pre-accession support for the CEE countries by main areas as a percentage of the total or sectoral value added, determining the expected degree of limited harmonization in the ENP countries and estimating “coefficients of limited harmonization”, which was subsequently used for adjustment of the estimated cost of full harmonization.
Authored by: Veliko Dmitrov
This paper employs a standard Tobin-Markowitz framework to analyse the determinants of capital flows into the CIS countries. Using data from 1996-2006, we find that the Russian financial crisis of 1998 has had a profound impact on capital flows into the CIS (both directly and indirectly). Firstly, it introduced a structural shift in the investors' behaviour by shifting the focus from the external factors to the internal ones, e.g. domestic interest and GDP growth rates. Secondly, it also drastically changed the impact of a number of explanatory variables on capital flows into the CIS. Political risk was found to be the second most important determinant of capital flows into the CIS. Additionally, we report some strong evidence of co-movement between portfolio flows into the CIS and CEEC, coupled with strong complementarity between global stock market activity and portfolio inflows into the CIS. Interestingly, external factors tend to be of a higher significance than internal factors for the largest members (Russia, Ukraine and Kazakhstan) of the CIS; whereas domestic variables tend to have a greater impact on the capital flows into the smaller CIS countries.
Authored by: Oleksandr Lozovyi
Published in 2007
After a long period in which state-led development was the dominant economic paradigm, since the 1980s private sector development has been the focus for economic policy makers. It is probably no coincidence that economic growth, stagnant for a few decades in much of the developing world, took off in the 1990s after this policy shift, and has generally remained high (in spite of a wave of crises and recessions in the late 1990s and early 2000s). Privatization has made a great deal of progress in the developing world, particularly in Latin America, though the Middle East and North Africa (MENA) have lagged somewhat.
Authored by: Richard Woodward, Mehdi Safavi, Piotr Kozarzewski
Published in 2012
The purpose of this paper is to examine the economic aspects of EU policy towards its Eastern neighbors in the former Soviet Union. For a long period of time, this region was considered as less important for the EU, as compared to Central and Eastern Europe, which was the subject of a far-reaching economic and political integration offer materialized in two rounds of EU Eastern Enlargements (2004, 2007). However, moving the EU's geographical frontier further to the East and Southeast increased the importance of the CIS region as a potential partner of the enlarged EU. In 2004, East European and Caucasus countries were invited to participate in the European Neighborhood Policy a new EU external policy framework also addressed to the Southern Mediterranean countries. Russia has been attempting to build a strategic political and economic partnership with the EU outside the ENP framework but the content of this relationship is, in fact, very similar to the ENP.
A general weakness of the ENP is that there is a lack of balance between farreaching expectations with respect to neighbors' policies and reforms, and limited and distant rewards that can potentially be offered. Thus, making this cooperation framework more effective requires a serious enhancement of the rewards using, to the extent possible, the positive experience of previous EU enlargements. The nature of contemporary economic relations in the globalized world calls for a more complex package-type approach to economic integration rather than just limiting cooperation to some narrow fields.
Authored by: Marek Dąbrowski
Published in 2007
This paper analyses the impact of exchange rate regimes on the real sector. While most studies in this field have so far concentrated on aggregate variables, we pursue a sectoral approach distinguishing between the tradable and nontradable sectors. Firstly, we present a survey of the relevant theoretical and empirical literature. This demonstrates that evaluations of exchange rate regimes and their impact on the real economy are largely dependant on specific assumptions concerning, in particular, the parameters of a utility function, the nature of the price adjustment process and the characteristics of analysed shocks. Secondly, we conduct an empirical analysis of the behaviour of the tradable and nontradable sectors under different exchange rate regimes for seven Central and Eastern European countries. We find no firm evidence of a differential impact of given exchange rate regimes on the dynamics of output and prices in the two sectors. We proffer a conceptual and technical interpretation of this.
Authored by: Przemyslaw Kowalski, Wojciech Paczynski, Łukasz Rawdanowicz
Published in 2003
The paper discusses the role of regional public goods vs. global goods in influencing postcommunist transition in Central and Eastern Europe and former USSR with special attention given to three particular factors: (i) external anchoring of national reform process; (ii) international trade arrangements and (iii) international financial stability.
Authored by: Marek Dabrowski, Artur Radziwill
Published in 2007
This paper focuses on roots of strain in the European Monetary Union (EMU). It argues that there is need for a thorough reform of the governance structure of the Union in conjunction with radical changes in the regulation and supervision of financial markets. Financial intermediation has gone astray in recent decades and entailed a big bubble in the industrialized world. Waves of financial deregulation have enhanced systemic risks, via speculative behavior and growing inter-connectedness. Moreover, the EMU was sub-optimal from its debut and competitiveness gaps did not diminish against the backdrop of its inadequate policy and institutional design. The euro zone crisis is not related to fiscal negligence only; over-borrowing by the private sector and poor lending by banks, as well as a one-sided monetary policy, also explain this debacle. The EMU needs to complement its common monetary policy with solid fiscal/budget underpinnings. Fiscal rules and sanctions are necessary, but not sufficient. A common treasury (a federal budget) is needed in order to help the EMU absorb shocks and forestall confidence crises. A joint system of regulation and supervision of financial markets should operate. Emergency measures have to be comprehensive and acknowledge the necessity of a lender of last resort; they have to combat vicious circles. Structural reforms and EMU level policies are needed to enhance competitiveness in various countries and foster convergence. The EU has to work closely with the US and other G20 members in order to achieve a less unstable global financial system.
Authored by: Daniel Daianu
Published in 2012
Institutional harmonization is an important part of European integration, and its effects are more far reaching than the effects of trade liberalization. In its policy towards neighbors (the European Neighborhood Policy, ENP), the EU puts a lot of stress on the desirability of institutional harmonization, at least in certain areas. In particular, the free trade agreements that the EU envisages concluding with its Eastern neighbors will involve substantial harmonization of product standards, competition policy and a range of other policies and processes. At the very least, the harmonization will have to focus on the areas that relate to improvement of market access, i.e. removing restrictions to trade, harmonizing product standards and the systems of quality control etc. But in order to implement the new standards and rules, the EU neighbors will have to reform many related areas, so that the harmonization will encompass the whole system of economic governance. Not only will such a revamp help attaining better access to the EU markets, but also (and probably more importantly) it will stimulate modernization of the neighbors' economies and bring much needed efficiency gains.
In measurement of benefits of harmonization we refer to two methods: one based on the computable general equilibrium (CGE) modeling of welfare effects of better market access, and the other employing a growth model to estimate the wider effects of European institutions on growth. The estimation of costs of harmonization bases on extrapolation of the analogous costs in other countries, in particular CEE. These costs include expenses by a public sector on introduction of harmonization measures, as well as private sector expenses and investments related to their implementation.
Authored by: Anna Kolesnichenko
Published in 2009
During the last two decades the CIS countries have received very significant amounts of technical assistance from international development organizations and bilateral donors. While this has played a positive and important role in the transformation of these societies, practically all stakeholders currently share the opinion that many problems have accumulated in the area of technical cooperation with CIS countries. This paper intends to outline these problems, analyze their underlying reasons - including the changing environment for technical cooperation in the CIS - and the interaction of the interests of beneficiaries, donors and providers in the process of implementing technical cooperation projects. The analysis suggests that a good understanding, recognition and coordination of the interests of all TC stakeholders and a reduction in the information gap between the various participants in the technical cooperation process are necessary for improving the effectiveness of technical cooperation.
Authored by: Aziz Atamanov, Roman Mogilevsky
Published in 2008
The paper discusses the current and potential role of the European Neighbourhood Policy (ENP) in anchoring economic reforms in the countries of the EU's Eastern Neighbourhood. It claims that it is too early to assess the success of the ENP in this sphere especially given that the actual progress of the ENP agenda has been limited. A review of the empirical evidence on external reform anchors confirms that the ENP shares some features with the EU accession process that has proven to be an effective mechanism supporting major economic, political and social changes in the countries concerned. The eventual ENP economic offer is meaningful and integration with the EU is getting stronger public support in several CIS countries and among their political elites. On the other hand several factors limit the reform anchoring potential of the ENP. This paper offers recommendations on policies that could strengthen this potential.
Authored by: Wojciech Paczynski
Published in 2009
This paper analyzes the direct and indirect income effects of international labor migration and remittances in selected CIS countries. The analysis is based on computable general equilibrium (CGE) models for Moldova, Ukraine, Georgia, Kyrgyzstan, and Russia. All net emigration countries would experience a sharp contraction of private consumption in the absence of remittances. In Russia, the main effect of immigration has been to hold down the real wage (as potential capital stock adjustments in response to immigration are not reflected in the authors comparative-static modeling framework). The paper concludes that because of the important contribution of migration and remittances to stabilizing and sustaining incomes in many CIS countries, enhanced opportunities for legal labor migration should figure prominently in any deepening of bilateral relations between CIS countries and the European Union under the European Neighborhood Policy.
Authored by: Aziz Atamanov, Toman Omar Mahmoud, Roman Mogilevsky, Kseniya Tereshchenko, Natalia Tourdyeva
Published in 2009
Ainura Uzagalieva
Vitaly Vavryschuk
Demographic change (driven by the second demographic transition) led to an uncontrolled increase in scale of various social expenditure in the OECD area, especially in continental Europe. Costs of social transfers created fiscal pressure leading to the necessity of tax increases all over Europe, including the New Member States. Employment consequences of emerging higher tax wedge has become the topic of large body of research. However, surprisingly little evidence is known on distribution of that problem across workers. Is the effect of high tax wedge equally spread or certain groups of workers suffer more than others? More specifically, are low productivity workers exposed more to the problems caused by high tax wedge?
Authored by: Marek Gora, Artur Radziwill, Agnieszka Sowa, Mateusz Walewski
Published in 2006
In the 1990s, the CIS region experienced a painful transformation following the collapse of the USSR and the command economy. For the less developed republics of the former USSR, this process was even more dramatic as they lost subsidies from the Union's budget and some of them suffered devastating conflicts.
In the 2000s, after overcoming the adaptation output decline and the consequences of the 1998-1999 financial crises, these economies started to grow rapidly, reducing poverty and macroeconomic imbalances. However, their future growth prospects are increasingly vulnerable due to their strong dependence on commodity exports, a poor business and investment climate, endemic corruption and weak governance. Quite recently, fighting high inflation has returned to the policy agenda.
The modernization and diversification of the low-income CIS economies requires further market and institutional reforms aimed at overcoming the Soviet legacy of a repressive and inefficient state. The international community can help by resolving regional conflicts, assisting with trade and economic integration, and offering well-targeted development assistance.
Authored by: Marek Dąbrowski
Published in 2008
Despite its many advantages, the Eastern and Southern Mediterranean region remains relatively backward in economic and social terms and is rightly considered a potential source of social and political instability. Its average GDP per capita lags behind the global average and is increasing slowly due to weak economic policies, poor governance and rapid population growth. The region suffers from high unemployment (especially among women and youth), poor education, high levels of income inequality, gender discrimination, underdeveloped infrastructure, continuous trade protectionism, and a poor business climate. To overcome these development obstacles, MED countries should conduct comprehensive reforms of their economic, social and political systems with the aim of ensuring macroeconomic stability, increasing trade and investment openness, improving the business climate and governance system, and upgrading infrastructure and human capital.
The main economic and political partners of the MED countries, especially the EU, can actively support this modernization agenda through liberalizing trade in some sensitive sectors (like agriculture and services), adopting a more flexible approach to MED labor migration, and cooperating in mitigating climate changes, improving educational outcomes, and promoting science and culture. This will require renewed initiatives with dedicated technical assistance and continued and enhanced financial assistance, particularly to improve infrastructure. There is also a lot of room for improvement in intra-MED cooperation but this requires resolving the protracted political conflicts in the region and taking bolder steps to remove trade and investment barriers.
Written by Marek Dąbrowski and Luc De Wulf. Published in January 2013.
PDF available on our website: http://www.case-research.eu/en/node/57925
The Eurozone crisis mobilises an appreciable amount of the attention of politicians and the public, with calls for a decisive defence of the euro, because the single currency’s demise is said to be the beginning of the end of the EU and Single European Market. In our view, preserving the euro may result in something completely different than expected: the disintegration of the EU and the Single European Market rather than their further strengthening. The fundamental problem with the common currency is individual countries’ inability to correct their external exchange rates, which normally constitutes a fast and efficient adjustment instrument, especially in crisis times.
Europe consists of nation states that constitute the major axes of national identity and major sources of government’s legitimisation. Staying within the euro zone may sentence some countries – which, for whatever reason, have lost or may lose competitiveness – to economic, social and civilizational degradation, and with no way out of this situation. This may disturb social and political cohesion in member countries, give birth to populist tendencies that endanger the democratic order, and hamper peaceful cooperation in Europe. The situation may get out of control and trigger a chaotic break-up of the euro zone,
threatening the future of the whole EU and Single European Market.
In order to return to the origins of European integration and avoid the chaotic break-up of the euro zone, the euro zone should be dismantled in a controlled manner. If a weak country were to leave the euro zone, it would entail panic and a banking system collapse. Therefore we opt for a different scenario, in which the euro area is slowly dismantled in such a way that the most competitive countries or group of such countries leave the euro zone. Such a step would create a new European currency regime based on national currencies or currencies serving groups of homogenous countries, and save EU institutions along with the Single European Market.
This paper has been also published in "German Economic Review" (Volume 14, Issue 1, pages 31–49, February 2013)
Authored by: Stefan Kawalec and Ernest Pytlarczyk
This paper claims that the European Neighbourhood Policy (ENP) of the EU, and in particular the elements related to justice and home affairs (JHA), is a complex, multilayered initiative that incorporates different logics and instruments. To unravel the various layers of the policy, the paper proceeds in three steps: firstly, it lays out some facts pertaining to the origins of the ENP, as its ‘origins’ arguably account for a number of the core tensions. It then presents the underlying logic and objectives attributed to JHA cooperation, which can be derived from the viewpoints voiced during policy formulation. The paper goes on to argue that despite the existence of different logics, there is a unifying objective, which is to ‘extra-territorialise’ the management of ‘threats’ to the neighbouring countries. The core of the paper presents the various policy measures that have been put in place to achieve external ‘threat management’. In this context it is argued that the ’conditionality-inspired policy instruments’, namely monitoring and benchmarking of progress, transfer of legal and institutional models to non-member states and inter-governmental negotiations, contain socialisation elements that rely on the common values approach. This mix of conditionality and socialisation instruments is illustrated in two case studies, one on the fight against terrorism and one on irregular migration. Finally, the paper recommends that the EU draft an Action-Oriented Paper (AOP) on JHA cooperation with the ENP countries that indicates how the EU intends to balance the conflicting objectives and instruments that are currently present in the JHA provisions of the ENP.
Authored by: Nicole Wichmann
Published in 2007
The objective of the PICK-ME (Policy Incentives for Creation of Knowledge – Methods and Evidence) research project is to provide theoretical and empirical perspectives on innovation which give a greater role to the demand-side aspect of innovation. The main question is how can policy make enterprises more willing to innovate? This task is fulfilled by identifying what we consider the central or most salient aspect of a demand-side innovation- driven economy, which is the small and entrepreneurial yet fast growing and innovative firm. We use the term “Gazelle” to signify this type of firm throughout the paper. The main concern of policy-makers should therefore be how to support Gazelle type of firms through various policies. The effectiveness of different policy instruments are considered. For example, venture capitalism is in the paper identified as an important modern institution that renders exactly the type of coordination necessary to bring about an innovation system more orientated towards the demand side. This is because experienced entrepreneurs with superior skills in terms of judging the marketability of new innovations step in as financiers. Other factor market bottlenecks on the skills side must be targeted through education policies that fosters centers of excellence. R&D incentives are also considered as a separate instrument but more a question for future research since there is no evidence available on R&D incentives as a Gazelle type of policy. Spatial policies to foster more innovation have been popular in the past. But we conclude that whereas the literature often finds that new knowledge is developed in communities of physically proximate firms, there is no overshadowing evidence showing that spatial policies in particular had any impact on generating more of the Gazelle type of firms.
Authored by: Itzhak Goldberg, Camilla Jensen
Published in 2014
In recent years, the EU has assumed a greater role in dealing with security concerns
within the EU. In response to nation states’ decreasing capabilities to deal effectively
with problems at the national level, domestic policy fields such as asylum and migration
have been at least partially transferred to supranational responsibility (Scharpf, 2003;
Zürn, 2000). One of the issues that receives increasing attention at the supranational
level is irregular migration. Every year, an estimated 30 million people cross an
international border irregularly, of which, according to Europol, between 400,000 and
500,000 enter the EU. The stock of irregular residents in the EU is currently estimated
to be around three million (Council of Europe, 2003). In recent years, EU members
have come to the conclusion that they are no longer able to properly react to the
phenomenon of irregular migration on the domestic level and instead need to combine
their efforts regarding return policies on the European level. Measures against irregular
immigration thus became a focal point in the EU’s efforts to establish an ‘area of
freedom, security and justice’.
At the same time, the EU’s role in the outside world has changed. With the Eastern
enlargement, new regions and countries became neighbours of the EU. New
frameworks of cooperation, such as the Stabilisation and Association Process (SAP)
and the European Neighbourhood Policy (ENP) were set in motion to closely affiliate
neighbouring states with the EU (Emerson, 2005; Emerson & Noutcheva, 2005;
Emerson et al., 2007; Landaburu, 2006; Tassinari, 2006). The EU tried to assume a
greater responsibility in the stabilisation of the neighbourhood and sought to “promote a
ring of well governed countries to the East of the European Union and on the borders
of the Mediterranean with whom we can enjoy close and cooperative relations”
(European Security Strategy, 2003, p. 8). A major challenge in the EU’s efforts to
stabilise the neighbourhood was to find a proper balance with the internal security
concerns. Whereas the EU’s foreign and security policy was interested in advancing
regional integration and good neighbourly relations, the EU justice and home affairs
ministers were primarily guided by their interest in keeping problems out and the
external border closed.
This paper is concerned with an EU foreign policy instrument that is a case in point for
this struggle: EC visa facilitation and readmission agreements. These agreements aim
at fostering good neighbourly relations by easing the tight visa regime with
neighbouring countries in order to externalise a restrictive migration policy. By
elaborating on the EU’s strategy on visa facilitation and readmission, this paper aims at
offering a first systematic analysis of the objective, substance, and political implications
of these agreements. When was the link between visa facilitation and readmission
made? What are the target
The paper discusses possible directions and magnitudes of the relationship between the social security driven tax wedge, employment and shadow employment in Russia and Ukraine. The first section presents a summary of the economic and institutional background for development of the current size and structure of the socially driven tax wedge in both countries. The second section presents some theoretical considerations on the relationship between the social protection system, tax wedge, non-employment and finally, shadow employment. The third section contains an attempt to econometrically estimate the magnitude of the possible relationship between the tax wedge and total employment rates in both countries. In the fourth section, the authors try to discover the mechanism of influence of the last reform of the Ukrainian payroll tax system on the structure and size of shadow employment in the country. The last analytical section closes the circle leading the reader back from shadow employment to wages and finally to the issue of access to social security institutions. The last section concludes.
Authored by: Marek Gora, Oleksandr Rohozynsky, Irina Sinitsina, Mateusz Walewski
Published in 2009
This paper provides the quantitative estimate of the potential growth bonus for CIS countries, and in particular EU's Easter Neighbours, that can be a result of deeper institutional harmonisation with the EU. Econometric investigation involving instrumental variable, simultaneous equation and dynamic panel techniques documents the strong positive link between growth performance and reforms, as well as between reforms and European integration. The paper derives the range of possible values of growth bonus from the deepened neighbourhood cooperation between 1 and 3.8 with the median at 1.8 percentage points. The least growth bonus is expected through basic liberalization reforms, while countries with a considerable institutional gap are likely to gain the most.
Authored by: Artur Radziwill, Pawel Smietanka
Published in 2009
The paper discusses the salience of the Finno-Ugric links in substantiating intra-EU cooperation among Finland, Estonia and Hungary. The focus is on investigating evidence of such cooperation in the EU's human rights and minority rights related policies towards the Russian Federation and other eastern neighbourhood states. The paper gives an account of institutionalised forms of cultural and political co-operation among the three countries under study. It discusses whether small EU states can coalesce under constructive policy alliances or not. The paper presents the current foreign policy narratives in Finland, Hungary and Estonia and locates the Finno-Ugric narrative in this general framework.
Authored by: Umut Korkut
Published in 2008
The paper presents new results on within-country regional inequality in per capita income for 36 countries during 1995-2005; focusing on Europe but with some non-European countries included for comparison. In 23 of the 36 countries there was a significant increase in regional inequality during the period, and in only three cases there was a reduction. Regional inequality increased in all countries of Central and Eastern Europe, while for most Western European countries there was little change. For the EU-27 as a whole, there was a modest increase in within-country regional inequality, but convergence across countries. The latter effect was quantitatively more important, so on the whole there was income convergence in the EU-27, especially after 2000. Regional inequality is particularly important for some large middle-income countries such as China, Russia and Mexico. In such countries there may however be considerable price differences across regions, and the use of common price deflators for the whole country may lead to a biased assessment of regional inequality.
Authored by: Arne Melchior
Published in 2008
The CIS region is of vital importance for the EU countries considering that both are interconnected through cooperation or membership in supranational political and economic institutions (OSCE, WTO, OECD, NATO, etc.), through transport and energy corridors, through investment, trade and migration trends.
The interests of EU member states in the region are very diverse and are sometimes pursued in contradiction to one another. The overarching interest is of an economic nature, given the large reserves of natural resources (particularly gas and oil) and due to the size of the CIS market of 277 million consumers. Security and immigration issues also rank high on the list, whereas EU countries are less concerned with democratisation trends in the CIS. Russia is the most important CIS partner for a majority of EU countries. Energy plays a disproportionally high role in EU member states (MS) - Russia relations and is also a strong determinant of the overall heterogeneity of EU MS policies towards Russia. The type of bilateral relations which the EU MS maintain with one sub-region of the CIS (particularly the EENP, but increasingly also Central Asia) also affects their relations with Russia. Cultural closeness and a common history still play a large part in the development of bilateral relations. The accession to the EU of Central and Eastern European states has altered the existing relations between them and their eastern CIS neighbours, thereby also modifying their interests in the region. Regrettably, the EU's policies towards Russia and the EENP region have not yet been able to provide a playing field able to compensate for this alteration.
Thus, the present report studies the various interests (political, security, economic, cultural) which underpin relations between the EU member states and the CIS countries and also discusses the latest developments in EU policies towards a specific CIS sub-region (Russia, the Eastern ENP and Central Asia), thereby providing a broad picture of the type of interests, how they are pursued by the EU member states and where these intersect or clash.
Authored by: George Dura
Published in 2008
After a long period in which state-led development was the dominant economic paradigm, since the 1980s private sector development has been the focus for economic policy makers. It is probably no coincidence that economic growth, stagnant for a few decades in much of the developing world, took off in the 1990s after this policy shift, and has generally remained high (in spite of a wave of crises and recessions in the late 1990s and early 2000s). Privatization has made a great deal of progress in the developing world, particularly in Latin America, though the Middle East and North Africa (MENA) have lagged somewhat.
Authored by: Richard Woodward, Mehdi Safavi, Piotr Kozarzewski
Published in 2012
The purpose of this paper is to examine the economic aspects of EU policy towards its Eastern neighbors in the former Soviet Union. For a long period of time, this region was considered as less important for the EU, as compared to Central and Eastern Europe, which was the subject of a far-reaching economic and political integration offer materialized in two rounds of EU Eastern Enlargements (2004, 2007). However, moving the EU's geographical frontier further to the East and Southeast increased the importance of the CIS region as a potential partner of the enlarged EU. In 2004, East European and Caucasus countries were invited to participate in the European Neighborhood Policy a new EU external policy framework also addressed to the Southern Mediterranean countries. Russia has been attempting to build a strategic political and economic partnership with the EU outside the ENP framework but the content of this relationship is, in fact, very similar to the ENP.
A general weakness of the ENP is that there is a lack of balance between farreaching expectations with respect to neighbors' policies and reforms, and limited and distant rewards that can potentially be offered. Thus, making this cooperation framework more effective requires a serious enhancement of the rewards using, to the extent possible, the positive experience of previous EU enlargements. The nature of contemporary economic relations in the globalized world calls for a more complex package-type approach to economic integration rather than just limiting cooperation to some narrow fields.
Authored by: Marek Dąbrowski
Published in 2007
This paper analyses the impact of exchange rate regimes on the real sector. While most studies in this field have so far concentrated on aggregate variables, we pursue a sectoral approach distinguishing between the tradable and nontradable sectors. Firstly, we present a survey of the relevant theoretical and empirical literature. This demonstrates that evaluations of exchange rate regimes and their impact on the real economy are largely dependant on specific assumptions concerning, in particular, the parameters of a utility function, the nature of the price adjustment process and the characteristics of analysed shocks. Secondly, we conduct an empirical analysis of the behaviour of the tradable and nontradable sectors under different exchange rate regimes for seven Central and Eastern European countries. We find no firm evidence of a differential impact of given exchange rate regimes on the dynamics of output and prices in the two sectors. We proffer a conceptual and technical interpretation of this.
Authored by: Przemyslaw Kowalski, Wojciech Paczynski, Łukasz Rawdanowicz
Published in 2003
The paper discusses the role of regional public goods vs. global goods in influencing postcommunist transition in Central and Eastern Europe and former USSR with special attention given to three particular factors: (i) external anchoring of national reform process; (ii) international trade arrangements and (iii) international financial stability.
Authored by: Marek Dabrowski, Artur Radziwill
Published in 2007
This paper focuses on roots of strain in the European Monetary Union (EMU). It argues that there is need for a thorough reform of the governance structure of the Union in conjunction with radical changes in the regulation and supervision of financial markets. Financial intermediation has gone astray in recent decades and entailed a big bubble in the industrialized world. Waves of financial deregulation have enhanced systemic risks, via speculative behavior and growing inter-connectedness. Moreover, the EMU was sub-optimal from its debut and competitiveness gaps did not diminish against the backdrop of its inadequate policy and institutional design. The euro zone crisis is not related to fiscal negligence only; over-borrowing by the private sector and poor lending by banks, as well as a one-sided monetary policy, also explain this debacle. The EMU needs to complement its common monetary policy with solid fiscal/budget underpinnings. Fiscal rules and sanctions are necessary, but not sufficient. A common treasury (a federal budget) is needed in order to help the EMU absorb shocks and forestall confidence crises. A joint system of regulation and supervision of financial markets should operate. Emergency measures have to be comprehensive and acknowledge the necessity of a lender of last resort; they have to combat vicious circles. Structural reforms and EMU level policies are needed to enhance competitiveness in various countries and foster convergence. The EU has to work closely with the US and other G20 members in order to achieve a less unstable global financial system.
Authored by: Daniel Daianu
Published in 2012
Institutional harmonization is an important part of European integration, and its effects are more far reaching than the effects of trade liberalization. In its policy towards neighbors (the European Neighborhood Policy, ENP), the EU puts a lot of stress on the desirability of institutional harmonization, at least in certain areas. In particular, the free trade agreements that the EU envisages concluding with its Eastern neighbors will involve substantial harmonization of product standards, competition policy and a range of other policies and processes. At the very least, the harmonization will have to focus on the areas that relate to improvement of market access, i.e. removing restrictions to trade, harmonizing product standards and the systems of quality control etc. But in order to implement the new standards and rules, the EU neighbors will have to reform many related areas, so that the harmonization will encompass the whole system of economic governance. Not only will such a revamp help attaining better access to the EU markets, but also (and probably more importantly) it will stimulate modernization of the neighbors' economies and bring much needed efficiency gains.
In measurement of benefits of harmonization we refer to two methods: one based on the computable general equilibrium (CGE) modeling of welfare effects of better market access, and the other employing a growth model to estimate the wider effects of European institutions on growth. The estimation of costs of harmonization bases on extrapolation of the analogous costs in other countries, in particular CEE. These costs include expenses by a public sector on introduction of harmonization measures, as well as private sector expenses and investments related to their implementation.
Authored by: Anna Kolesnichenko
Published in 2009
During the last two decades the CIS countries have received very significant amounts of technical assistance from international development organizations and bilateral donors. While this has played a positive and important role in the transformation of these societies, practically all stakeholders currently share the opinion that many problems have accumulated in the area of technical cooperation with CIS countries. This paper intends to outline these problems, analyze their underlying reasons - including the changing environment for technical cooperation in the CIS - and the interaction of the interests of beneficiaries, donors and providers in the process of implementing technical cooperation projects. The analysis suggests that a good understanding, recognition and coordination of the interests of all TC stakeholders and a reduction in the information gap between the various participants in the technical cooperation process are necessary for improving the effectiveness of technical cooperation.
Authored by: Aziz Atamanov, Roman Mogilevsky
Published in 2008
The paper discusses the current and potential role of the European Neighbourhood Policy (ENP) in anchoring economic reforms in the countries of the EU's Eastern Neighbourhood. It claims that it is too early to assess the success of the ENP in this sphere especially given that the actual progress of the ENP agenda has been limited. A review of the empirical evidence on external reform anchors confirms that the ENP shares some features with the EU accession process that has proven to be an effective mechanism supporting major economic, political and social changes in the countries concerned. The eventual ENP economic offer is meaningful and integration with the EU is getting stronger public support in several CIS countries and among their political elites. On the other hand several factors limit the reform anchoring potential of the ENP. This paper offers recommendations on policies that could strengthen this potential.
Authored by: Wojciech Paczynski
Published in 2009
This paper analyzes the direct and indirect income effects of international labor migration and remittances in selected CIS countries. The analysis is based on computable general equilibrium (CGE) models for Moldova, Ukraine, Georgia, Kyrgyzstan, and Russia. All net emigration countries would experience a sharp contraction of private consumption in the absence of remittances. In Russia, the main effect of immigration has been to hold down the real wage (as potential capital stock adjustments in response to immigration are not reflected in the authors comparative-static modeling framework). The paper concludes that because of the important contribution of migration and remittances to stabilizing and sustaining incomes in many CIS countries, enhanced opportunities for legal labor migration should figure prominently in any deepening of bilateral relations between CIS countries and the European Union under the European Neighborhood Policy.
Authored by: Aziz Atamanov, Toman Omar Mahmoud, Roman Mogilevsky, Kseniya Tereshchenko, Natalia Tourdyeva
Published in 2009
Ainura Uzagalieva
Vitaly Vavryschuk
Demographic change (driven by the second demographic transition) led to an uncontrolled increase in scale of various social expenditure in the OECD area, especially in continental Europe. Costs of social transfers created fiscal pressure leading to the necessity of tax increases all over Europe, including the New Member States. Employment consequences of emerging higher tax wedge has become the topic of large body of research. However, surprisingly little evidence is known on distribution of that problem across workers. Is the effect of high tax wedge equally spread or certain groups of workers suffer more than others? More specifically, are low productivity workers exposed more to the problems caused by high tax wedge?
Authored by: Marek Gora, Artur Radziwill, Agnieszka Sowa, Mateusz Walewski
Published in 2006
In the 1990s, the CIS region experienced a painful transformation following the collapse of the USSR and the command economy. For the less developed republics of the former USSR, this process was even more dramatic as they lost subsidies from the Union's budget and some of them suffered devastating conflicts.
In the 2000s, after overcoming the adaptation output decline and the consequences of the 1998-1999 financial crises, these economies started to grow rapidly, reducing poverty and macroeconomic imbalances. However, their future growth prospects are increasingly vulnerable due to their strong dependence on commodity exports, a poor business and investment climate, endemic corruption and weak governance. Quite recently, fighting high inflation has returned to the policy agenda.
The modernization and diversification of the low-income CIS economies requires further market and institutional reforms aimed at overcoming the Soviet legacy of a repressive and inefficient state. The international community can help by resolving regional conflicts, assisting with trade and economic integration, and offering well-targeted development assistance.
Authored by: Marek Dąbrowski
Published in 2008
Despite its many advantages, the Eastern and Southern Mediterranean region remains relatively backward in economic and social terms and is rightly considered a potential source of social and political instability. Its average GDP per capita lags behind the global average and is increasing slowly due to weak economic policies, poor governance and rapid population growth. The region suffers from high unemployment (especially among women and youth), poor education, high levels of income inequality, gender discrimination, underdeveloped infrastructure, continuous trade protectionism, and a poor business climate. To overcome these development obstacles, MED countries should conduct comprehensive reforms of their economic, social and political systems with the aim of ensuring macroeconomic stability, increasing trade and investment openness, improving the business climate and governance system, and upgrading infrastructure and human capital.
The main economic and political partners of the MED countries, especially the EU, can actively support this modernization agenda through liberalizing trade in some sensitive sectors (like agriculture and services), adopting a more flexible approach to MED labor migration, and cooperating in mitigating climate changes, improving educational outcomes, and promoting science and culture. This will require renewed initiatives with dedicated technical assistance and continued and enhanced financial assistance, particularly to improve infrastructure. There is also a lot of room for improvement in intra-MED cooperation but this requires resolving the protracted political conflicts in the region and taking bolder steps to remove trade and investment barriers.
Written by Marek Dąbrowski and Luc De Wulf. Published in January 2013.
PDF available on our website: http://www.case-research.eu/en/node/57925
The Eurozone crisis mobilises an appreciable amount of the attention of politicians and the public, with calls for a decisive defence of the euro, because the single currency’s demise is said to be the beginning of the end of the EU and Single European Market. In our view, preserving the euro may result in something completely different than expected: the disintegration of the EU and the Single European Market rather than their further strengthening. The fundamental problem with the common currency is individual countries’ inability to correct their external exchange rates, which normally constitutes a fast and efficient adjustment instrument, especially in crisis times.
Europe consists of nation states that constitute the major axes of national identity and major sources of government’s legitimisation. Staying within the euro zone may sentence some countries – which, for whatever reason, have lost or may lose competitiveness – to economic, social and civilizational degradation, and with no way out of this situation. This may disturb social and political cohesion in member countries, give birth to populist tendencies that endanger the democratic order, and hamper peaceful cooperation in Europe. The situation may get out of control and trigger a chaotic break-up of the euro zone,
threatening the future of the whole EU and Single European Market.
In order to return to the origins of European integration and avoid the chaotic break-up of the euro zone, the euro zone should be dismantled in a controlled manner. If a weak country were to leave the euro zone, it would entail panic and a banking system collapse. Therefore we opt for a different scenario, in which the euro area is slowly dismantled in such a way that the most competitive countries or group of such countries leave the euro zone. Such a step would create a new European currency regime based on national currencies or currencies serving groups of homogenous countries, and save EU institutions along with the Single European Market.
This paper has been also published in "German Economic Review" (Volume 14, Issue 1, pages 31–49, February 2013)
Authored by: Stefan Kawalec and Ernest Pytlarczyk
This paper claims that the European Neighbourhood Policy (ENP) of the EU, and in particular the elements related to justice and home affairs (JHA), is a complex, multilayered initiative that incorporates different logics and instruments. To unravel the various layers of the policy, the paper proceeds in three steps: firstly, it lays out some facts pertaining to the origins of the ENP, as its ‘origins’ arguably account for a number of the core tensions. It then presents the underlying logic and objectives attributed to JHA cooperation, which can be derived from the viewpoints voiced during policy formulation. The paper goes on to argue that despite the existence of different logics, there is a unifying objective, which is to ‘extra-territorialise’ the management of ‘threats’ to the neighbouring countries. The core of the paper presents the various policy measures that have been put in place to achieve external ‘threat management’. In this context it is argued that the ’conditionality-inspired policy instruments’, namely monitoring and benchmarking of progress, transfer of legal and institutional models to non-member states and inter-governmental negotiations, contain socialisation elements that rely on the common values approach. This mix of conditionality and socialisation instruments is illustrated in two case studies, one on the fight against terrorism and one on irregular migration. Finally, the paper recommends that the EU draft an Action-Oriented Paper (AOP) on JHA cooperation with the ENP countries that indicates how the EU intends to balance the conflicting objectives and instruments that are currently present in the JHA provisions of the ENP.
Authored by: Nicole Wichmann
Published in 2007
The objective of the PICK-ME (Policy Incentives for Creation of Knowledge – Methods and Evidence) research project is to provide theoretical and empirical perspectives on innovation which give a greater role to the demand-side aspect of innovation. The main question is how can policy make enterprises more willing to innovate? This task is fulfilled by identifying what we consider the central or most salient aspect of a demand-side innovation- driven economy, which is the small and entrepreneurial yet fast growing and innovative firm. We use the term “Gazelle” to signify this type of firm throughout the paper. The main concern of policy-makers should therefore be how to support Gazelle type of firms through various policies. The effectiveness of different policy instruments are considered. For example, venture capitalism is in the paper identified as an important modern institution that renders exactly the type of coordination necessary to bring about an innovation system more orientated towards the demand side. This is because experienced entrepreneurs with superior skills in terms of judging the marketability of new innovations step in as financiers. Other factor market bottlenecks on the skills side must be targeted through education policies that fosters centers of excellence. R&D incentives are also considered as a separate instrument but more a question for future research since there is no evidence available on R&D incentives as a Gazelle type of policy. Spatial policies to foster more innovation have been popular in the past. But we conclude that whereas the literature often finds that new knowledge is developed in communities of physically proximate firms, there is no overshadowing evidence showing that spatial policies in particular had any impact on generating more of the Gazelle type of firms.
Authored by: Itzhak Goldberg, Camilla Jensen
Published in 2014
In recent years, the EU has assumed a greater role in dealing with security concerns
within the EU. In response to nation states’ decreasing capabilities to deal effectively
with problems at the national level, domestic policy fields such as asylum and migration
have been at least partially transferred to supranational responsibility (Scharpf, 2003;
Zürn, 2000). One of the issues that receives increasing attention at the supranational
level is irregular migration. Every year, an estimated 30 million people cross an
international border irregularly, of which, according to Europol, between 400,000 and
500,000 enter the EU. The stock of irregular residents in the EU is currently estimated
to be around three million (Council of Europe, 2003). In recent years, EU members
have come to the conclusion that they are no longer able to properly react to the
phenomenon of irregular migration on the domestic level and instead need to combine
their efforts regarding return policies on the European level. Measures against irregular
immigration thus became a focal point in the EU’s efforts to establish an ‘area of
freedom, security and justice’.
At the same time, the EU’s role in the outside world has changed. With the Eastern
enlargement, new regions and countries became neighbours of the EU. New
frameworks of cooperation, such as the Stabilisation and Association Process (SAP)
and the European Neighbourhood Policy (ENP) were set in motion to closely affiliate
neighbouring states with the EU (Emerson, 2005; Emerson & Noutcheva, 2005;
Emerson et al., 2007; Landaburu, 2006; Tassinari, 2006). The EU tried to assume a
greater responsibility in the stabilisation of the neighbourhood and sought to “promote a
ring of well governed countries to the East of the European Union and on the borders
of the Mediterranean with whom we can enjoy close and cooperative relations”
(European Security Strategy, 2003, p. 8). A major challenge in the EU’s efforts to
stabilise the neighbourhood was to find a proper balance with the internal security
concerns. Whereas the EU’s foreign and security policy was interested in advancing
regional integration and good neighbourly relations, the EU justice and home affairs
ministers were primarily guided by their interest in keeping problems out and the
external border closed.
This paper is concerned with an EU foreign policy instrument that is a case in point for
this struggle: EC visa facilitation and readmission agreements. These agreements aim
at fostering good neighbourly relations by easing the tight visa regime with
neighbouring countries in order to externalise a restrictive migration policy. By
elaborating on the EU’s strategy on visa facilitation and readmission, this paper aims at
offering a first systematic analysis of the objective, substance, and political implications
of these agreements. When was the link between visa facilitation and readmission
made? What are the target
The paper discusses possible directions and magnitudes of the relationship between the social security driven tax wedge, employment and shadow employment in Russia and Ukraine. The first section presents a summary of the economic and institutional background for development of the current size and structure of the socially driven tax wedge in both countries. The second section presents some theoretical considerations on the relationship between the social protection system, tax wedge, non-employment and finally, shadow employment. The third section contains an attempt to econometrically estimate the magnitude of the possible relationship between the tax wedge and total employment rates in both countries. In the fourth section, the authors try to discover the mechanism of influence of the last reform of the Ukrainian payroll tax system on the structure and size of shadow employment in the country. The last analytical section closes the circle leading the reader back from shadow employment to wages and finally to the issue of access to social security institutions. The last section concludes.
Authored by: Marek Gora, Oleksandr Rohozynsky, Irina Sinitsina, Mateusz Walewski
Published in 2009
This paper provides the quantitative estimate of the potential growth bonus for CIS countries, and in particular EU's Easter Neighbours, that can be a result of deeper institutional harmonisation with the EU. Econometric investigation involving instrumental variable, simultaneous equation and dynamic panel techniques documents the strong positive link between growth performance and reforms, as well as between reforms and European integration. The paper derives the range of possible values of growth bonus from the deepened neighbourhood cooperation between 1 and 3.8 with the median at 1.8 percentage points. The least growth bonus is expected through basic liberalization reforms, while countries with a considerable institutional gap are likely to gain the most.
Authored by: Artur Radziwill, Pawel Smietanka
Published in 2009
The paper discusses the salience of the Finno-Ugric links in substantiating intra-EU cooperation among Finland, Estonia and Hungary. The focus is on investigating evidence of such cooperation in the EU's human rights and minority rights related policies towards the Russian Federation and other eastern neighbourhood states. The paper gives an account of institutionalised forms of cultural and political co-operation among the three countries under study. It discusses whether small EU states can coalesce under constructive policy alliances or not. The paper presents the current foreign policy narratives in Finland, Hungary and Estonia and locates the Finno-Ugric narrative in this general framework.
Authored by: Umut Korkut
Published in 2008
The paper presents new results on within-country regional inequality in per capita income for 36 countries during 1995-2005; focusing on Europe but with some non-European countries included for comparison. In 23 of the 36 countries there was a significant increase in regional inequality during the period, and in only three cases there was a reduction. Regional inequality increased in all countries of Central and Eastern Europe, while for most Western European countries there was little change. For the EU-27 as a whole, there was a modest increase in within-country regional inequality, but convergence across countries. The latter effect was quantitatively more important, so on the whole there was income convergence in the EU-27, especially after 2000. Regional inequality is particularly important for some large middle-income countries such as China, Russia and Mexico. In such countries there may however be considerable price differences across regions, and the use of common price deflators for the whole country may lead to a biased assessment of regional inequality.
Authored by: Arne Melchior
Published in 2008
The CIS region is of vital importance for the EU countries considering that both are interconnected through cooperation or membership in supranational political and economic institutions (OSCE, WTO, OECD, NATO, etc.), through transport and energy corridors, through investment, trade and migration trends.
The interests of EU member states in the region are very diverse and are sometimes pursued in contradiction to one another. The overarching interest is of an economic nature, given the large reserves of natural resources (particularly gas and oil) and due to the size of the CIS market of 277 million consumers. Security and immigration issues also rank high on the list, whereas EU countries are less concerned with democratisation trends in the CIS. Russia is the most important CIS partner for a majority of EU countries. Energy plays a disproportionally high role in EU member states (MS) - Russia relations and is also a strong determinant of the overall heterogeneity of EU MS policies towards Russia. The type of bilateral relations which the EU MS maintain with one sub-region of the CIS (particularly the EENP, but increasingly also Central Asia) also affects their relations with Russia. Cultural closeness and a common history still play a large part in the development of bilateral relations. The accession to the EU of Central and Eastern European states has altered the existing relations between them and their eastern CIS neighbours, thereby also modifying their interests in the region. Regrettably, the EU's policies towards Russia and the EENP region have not yet been able to provide a playing field able to compensate for this alteration.
Thus, the present report studies the various interests (political, security, economic, cultural) which underpin relations between the EU member states and the CIS countries and also discusses the latest developments in EU policies towards a specific CIS sub-region (Russia, the Eastern ENP and Central Asia), thereby providing a broad picture of the type of interests, how they are pursued by the EU member states and where these intersect or clash.
Authored by: George Dura
Published in 2008
The The purpose of this paper is to analyze the various challenges facing European integration and the EU institutional architecture as result of the global financial crisis. The European integration process is not yet complete, both in terms of its content and geographical coverage. It can be viewed as a kind of intermediate hybrid between an international organization and a federation, subject to further evolution. This is also true of the Single European Market and the Economic and Monetary Union, which form the core of the EU economic architecture. Certain policy prerogatives (such as external trade, competition, and the Common Agriculture Policy) are delegated to the supranational level while others (such as financial supervision or fiscal policy) remain largely in the hands of national authorities.
Authored by: Marek Dąbrowski
Published in 2009
This paper describes the general framework of the EU’s emerging relationship with its new neighbours and investigates the potential economic impact of the European Neighbourhood Policy (ENP), both for the EU itself and for its neighbours. In particular, it seeks to develop an answer to the question of whether the ENP is sufficiently attractive so as to induce the governments in neighbourhood countries to adopt (or accelerate the adoption of) the types of economic and governance reforms that were implemented in the new member states during their accession processes. Although the specifics of the ENP are still being developed, the lack of incentives as regards to unclear accession to the EU is identified as the main weakness of the ENP.
Economically, the ENP seeks to ease trade restrictions through the implementation of legislative approximation and convergence with EU standards, before accessing the EU’s single market can become a reality. Positively though, is that the access to the single market could improve significantly under the ENP. As experienced by the Central European states, FDI is instrumental to transform the economies of the Western CIS and the Caucasus. The ENP can be a supportive framework for improving investor confidence. Likewise, the new European Neighbourhood Instrument can add more coherence in technical assistance, and provide more financial support for creating capacities for trade infrastructures and institutional and private sector development. Finally, measures to promote increased labour migration between the new neighbours and the enlarged EU may be worth to put on the agenda for the future development and impact of the ENP.
Authored by: Susanne Milcher, Ben Slay
Published in 2005
This paper analyses the effect of the EU enlargement process on income convergence among regions in the EU and in the Eastern neighbourhood of the EU. The data used is NUTS II regions in the EU and Oblasts' of Russia over the period 1996-2004. The estimation techniques used take into account both regional and spatial heterogeneity. The main findings are that the regional income differences are reduced within EU15. The income convergence within the EU is mainly driven by reductions in the differences across countries rather than by a reduction in regional differences within countries. When differences in initial conditions in the regions are controlled for by fixed regional effects there are strong evidences of convergence among regions in all studied country groups.
Authored by: Fredrik Wilhelmsson
Published in 2009
The aim of this study is to estimate the impact of the removal of NTBs in trade between the EU and its selected CIS partners: Russia, Ukraine, Georgia, Armenia and Azerbaijan (CIS5). The report includes a discussion of methodologies of measurement of non-tariff barriers and the impact of their removal, including a review of previous studies focusing on CEE and CIS regions. Further, we employ a computable general equilibrium model encompassing the following three pillars of trade facilitation: legislative and regulatory approximation, reform of customs rules and procedures and liberalization of the access of foreign providers of services. We conclude that a reduction of NTBs and improved access to the EU market would bring significant benefits to the CIS5 countries in terms of welfare gains, GDP growth, increases in real wages and expansion of international trade. The possible welfare implications of deep integration with the EU range from 5.8% of GDP in Ukraine to sizeable expected gains in Armenia (3.1%), Russia (2.8%), Azerbaijan (1.8%) and Georgia (1.7%).
Authored by: Maryla Maliszewska, Irina Orlova, Svitlana Taran
Published in 2009
This paper aims to study the joint effects of the 2004 EU Enlargement and Russia’s entry into the WTO, and the effects of an eventual Russia-Enlarged EU Free Trade Agreement (FTA). The paper is organized as follows: in Section I, it starts with the brief description of the model used. The effects of the 2004 EU Enlargement are estimated on Section II. In Section III, the effects of Russia’s WTO Accession are simulated up on the benchmark of an Enlarged EU. Section IV simulates different Russia-EU FTAs, again upon the benchmark of an Enlarged EU. The work ends with a conclusion.
Authored by: Lucio Vinhas de Souza
Published in 2004
Labor migration from Eastern Europe and the member countries of Commonwealth of Independent States (CIS) to the Western countries became an important socio-economic issue. Since political systems and the nature of border management in these regions, migrations turned out to be a very complex and unpredictable issue. The purpose of this study is to analyze the region specific actors, practices and policies of migration in the Eastern countries, the possible scenarios and demographic consequences of the future migration flows. In order to address this issue properly, some of the complexities of labor migration phenomenon in the region are uncovered.
Authored by: Xavier Chojnicki, Ainura Uzagalieva
Published in 2008
Labor migration from Eastern Europe and the member countries of Commonwealth of Independent States (CIS) to the Western countries became an important socio-economic issue. Since political systems and the nature of border management in these regions, migrations turned out to be a very complex and unpredictable issue. The purpose of this study is to analyze the region specific actors, practices and policies of migration in the Eastern countries, the possible scenarios and demographic consequences of the future migration flows. In order to address this issue properly, some of the complexities of labor migration phenomenon in the region are uncovered.
Authored by: Xavier Chojnicki, Ainura Uzagalieva
Published in 2008
The paper discusses possible directions and magnitudes of the relationship between the social security driven tax wedge, employment and shadow employment in Russia and Ukraine. The first section presents a summary of the economic and institutional background for development of the current size and structure of the socially driven tax wedge in both countries. The second section presents some theoretical considerations on the relationship between the social protection system, tax wedge, non-employment and finally, shadow employment. The third section contains an attempt to econometrically estimate the magnitude of the possible relationship between the tax wedge and total employment rates in both countries. In the fourth section, the authors try to discover the mechanism of influence of the last reform of the Ukrainian payroll tax system on the structure and size of shadow employment in the country. The last analytical section closes the circle leading the reader back from shadow employment to wages and finally to the issue of access to social security institutions. The last section concludes.
Authored by: Marek Gora, Oleksandr Rohozynsky, Irina Sinitsina, Mateusz Walewski
Published in 2009
This paper reviews the published literature on the definition and measurement of the administrative and compliance costs of taxation, with special reference to VAT (including evasion and fraud) in the European Union.
Written by Luca Barbone, Richard M. Bird, and Jaime Vasquez-Caro. Published in March, 2012.
See more on our website: http://www.case-research.eu/en/node/57573
This paper investigates the differences in innovation behaviour, i.e. differences in innovation sources and innovation effects, among manufacturing firms in three NMS: the Czech Republic, Hungary and Poland. It is based on a survey of firms operating in four manufacturing industries: food and beverages, automotive, pharmaceuticals and electronics. The paper takes into account: innovation inputs in enterprises, cooperation among firms in R&D activities, the benefits of cooperation with business partners and innovation effects (innovation outputs and international competitiveness of firms' products and technology) in the three countries. After employing cluster analysis, five types of innovation patterns were detected. The paper characterises and compares these innovation patterns, highlighting differences and similarities. The paper shows that external knowledge plays an important role in innovation activities in NMS firms. The ability to explore cooperation with business partners and the benefits of using external knowledge are determined by in-house innovation activities, notably R&D intensity.
Authored by: Ewa Balcerowicz, Marek Pęczkowski, Anna Wziatek-Kubiak
Published in 2009
The aim of this paper is to examine the issues of gender disparities in the Commonwealth of Independent States (CIS) region, with a special focus given to countries covered by the European Neighbourhood Policy (ENP). The analysis is conducted in several dimensions: labour participation, economic opportunity, political empowerment, educational attainment, and health and demography. Beside the comparative study of "in region differentials" done for the CIS, I analyze the trends in gender disparities in comparison to EU-12 and EU-15, using data for the period 1985-2005.
The study confirms the existence of slightly different paths in which gender disparities have evolved over time. While in EU-15 women participation in labour market, their remuneration, and position in public life have significantly increased, in majority of the CIS countries a gradual decrease of female labour activity was reported. In addition female representation in politics and public life has shrunken after and during the transition period. On the other hand in such fields as secondary and tertiary education attainment, health, and demography male population in the CIS region has became more disadvantaged, which also leads to enlarging gender gap.
Authored by: Magdalena Rokicka
Published in 2008
This paper focuses on knowledge-based entrepreneurship, or new firm creation in industries which are considered to be science-based or to use research and development intensively, in the East Central European (ECE) context. On the basis of case studies of thirteen knowledge-based firms in six ECE countries, we suggest that KBE firms in these countries may differ in some important ways from the conventional picture of new technology based firms. In general, we see the ECE knowledge-intensive firm as a knowledge-localiser or customiser, adapting global knowledge to local needs on the domestic market, rather than a knowledge-creator generating new solutions for global markets. The entrepreneurs who start and run these businesses are skilled at spotting trends early and bringing them to their countries. Based in countries that generally have poor reputations as sources of innovative, high-technology products, but having established strong brands for themselves in their home markets, they are struggling with the challenge of entering export markets with products and services that can achieve global, or at least regional, recognition. The studies of the companies discussed here suggest that ECE firms are still in the early stages of this strategic shift.
Authored by: Slavo Radosevic, Richard Woodward, Deniz Eylem Yoruk
Published in 2011
The fifth enlargement of the EU has now brought together twenty five countries, a massive success. But success has its price: twenty-five countries do not cooperate as six used to. The result is a general impression that the undertaking is being diluted and that national interests prevail over the common good, which means less willingness to take the next integrative step. This paper argues that this perception is largely misguided. The EU-25 group is considerably more integrated than the EU-6 ever was. Dilution is not a necessary consequence of enlargement, rather enlargement is bringing to the fore a number of institutional failures that were present all along.
This paper takes a politico-economic view of the link between enlargement and deepening. After a broad review of the task allocation principles, it concludes that enlargement and deepening are not substitutes but complements. It produces evidence that enlargement is not increasing preference heterogeneities within the union, but that it leads national governments to preserve more forcefully their own powers, often against the wishes of their own citizens. The result is an inability to reform the decisionmaking process that has become unwieldy as the result of enlargement.
The issue, then, is how to restore the EU's ability to run its affairs. The European Constitutional Convention has made little headway. Other solutions that go beyond current debates are examined. "Pioneer clubs" raise many unresolved issues. More promising, maybe, is the idea that the acquis communautaires should be once and for all decisions. By lowering the stakes of both sovereignty transfers and qualified majority voting, allowing changes in both directions between shared and national competencies could encourage governments to accept more daring reforms. Strengthening the legitimacy of union-specific institutions (the European Parliament or the Commission Presidency) would create a counter-power to deal with national governments' natural tendency to defend their own prerogatives.
Authored by: Charles Wyplosz
Published in 2005
This paper analyses the spatial distribution of economic activity in the European Union at NUTS2 level over the 2001-2010 period. The aim of the study is twofold: (i) to provide descriptive evidence of the agglomeration distribution in Europe and its evolution over time across countries; (ii) to identify the nature of agglomeration and the factors that determine its level, with particular attention paid to the socio-ecological transformation occurring in Europe.
The study concludes that: a) the changes in agglomeration are sensitive to demographic transformations taking place; b) the ecological transformation has a mixed effect, depending on each country; c) significant differences are observed between new and old Member States; the crisis has had a significant influence on agglomeration but only in Western Europe.
Authored by: Izabela Styczynska and Constantin Zaman
This paper uses a multi region DSGE model with collateral constrained households and residential investment to examine the effectiveness of fiscal policy stimulus measures in a credit crisis. The paper explores alternative scenarios which differ by the type of budgetary measure, its length, the degree of monetary accommodation and the level of international coordination. In particular we provide estimates for New EU Member States where we take into account two aspects. First, debt denomination in foreign currency and second, higher nominal interest rates, which makes it less likely that the Central Bank is restricted by the zero bound and will consequently not accommodate a fiscal stimulus. We also compare our results to other recent results obtained in the literature on fiscal policy which generally do not consider credit constrained households.
Authored by: Jan in't Veld, Werner Roeger, István P. Székely
Published in 2011
Similar to CASE Network Studies and Analyses 378 - European Integration and Domestic Regions: A Numerical Simulation Analysis (20)
The report examines the social and economic drivers and impact of circular migration between Belarus and Poland, Slovakia, and the Czech Republic. The core question the authors sought to address was how managing circular migration could, in the long term, help to optimise labour resources in both the country of origin and the destination countries. In the pages that follow, the authors of the report present the current and forecasted labour market and demographic situation in their respective countries as well as the dynamics and characteristics of short-term labour migration flows between Belarus and Poland, Slovakia, and the Czech Republic, concentrating on the period since 2010. They also outline and discuss related policy responses and evaluate prospects for cooperation on circular migration.
Podręcznik został opracowany w celu przekazania trenerom i nauczycielom podstawowej wiedzy, która może być przydatna w prowadzeniu szkoleń promujących pracę rejestrowaną. Prezentuje on z jednej strony korzyści z pracy rejestrowanej, z drugiej – potencjalne koszty związane z pracą nierejestrowaną. W pierwszej kolejności informacje te przedstawiono w odniesieniu do pracowników najemnych (rozdział 2), podkreślając w sposób szczególny to, że negatywne konsekwencje pracy nierejestrowanej są ponoszone przez całe życie. Ze względu na specyficzną sytuację cudzoziemców pracujących w Polsce konsekwencje ponoszone przez tę grupę opisano oddzielnie (rozdział 3). Ponadto zaprezentowano skutki dotyczące pracodawców z szarej strefy z wyodrębnieniem tych, którzy zatrudniają cudzoziemców (rozdział 4). Uzupełnieniem przedstawionych informacji jest opis działań podejmowanych przez państwo w celu ograniczenia zjawiska pracy nierejestrowanej w Polsce (rozdział 5) oraz prowadzonych w Wielkiej Brytanii, czyli w kraju będącym liderem w walce z szarą strefą (rozdział 6).
European countries face a challenge related to the economic and social consequences of their societies’ aging. Specifically, pension systems must adjust to the coming changes, maintaining both financial stability, connected with equalizing inflows from premiums and spending on pensions, and simultaneously the sufficiency of benefits, protecting retirees against poverty and smoothing consumption over their lives, i.e. ensuring the ability to pay for consumption needs at each stage of life, regardless of income from labor.
One of the key instruments applied toward these goals is the retirement age. Formally it is a legally established boundary: once people have crossed it – on average – they significantly lose their ability to perform work (the so-called old-age risk). But since the 1970s, in many developed countries the retirement age has become an instrument of social and labor-market policy. Specifically, in the 1970s and ‘80s, an early retirement age was perceived as a solution allowing a reduction in the supply of labor, particularly among people with relatively low competencies who were approaching retirement age, which is called the lump of labor fallacy. It was often believed that people taking early retirement freed up jobs for the young. But a range of economic evidence shows that the number of jobs is not fixed, and those who retire don’t in fact free up jobs. On the contrary, because of higher spending by pension systems, labor costs rise, which limits the supply of jobs. In general, a good situation on the labor market supports employment of both the youngest and the oldest labor force participants. Additionally, a lower retirement age for women was maintained, which resulted to a high degree from cultural conditions and norms that are typical for traditional societies.
Until now, the banking sector has been one of the strong points of Poland’s economy. In contrast to banks in the U.S. and leading Western European economies, lenders in Poland came through the 2008 global financial crisis without a scratch, without needing state financial support. But in recent years the industry’s problems have been growing, creating a threat to economic growth and gains in living standards.
For an economy’s productivity to increase, funds can’t go to all companies evenly, and definitely shouldn’t go to those that are most lacking in funds, but to those that will use them most efficiently. This is true of total external financing, and thus funding both from the banking sector and from parabanks, the capital market and funds from public institutions. In Poland, in light of the relatively modest scale of the capital market, banks play a clearly dominant role in external financing of companies. This is why the author of this text focuses on the bank credit allocation efficiency.
The author points out that in the very near future, conditions will emerge in Poland which – as the experience of other countries shows – create a risk of reduced efficiency of credit allocation to business. Additionally, in Poland today, bank lending to companies is to a high degree being replaced by funds from state aid, which reduces the efficiency of allocation of external funds to companies (both loans and subsidies), as allocation of government subsidies is not usually based on efficiency. This decline in external financing allocation efficiency may slow, halt or even reverse the process, that has been uninterrupted for 28 years, of Poland’s convergence, i.e. the narrowing of the gap in living standards between Poland and the West.
The economic characteristics of the COVID-19 crisis differ from those of previous crises. It is a combination of demand- and supply-side constraints which led to the formation of a monetary overhang that will be unfrozen once the pandemic ends. Monetary policy must take this effect into consideration, along with other pro-inflationary factors, in the post-pandemic era. It must also think in advance about how to avoid a policy trap coming from fiscal dominance.
This paper is organized as follows: Chapter 2 deals with the economic characteristics of the COVID-19 pandemic and its impact on the effectiveness of the monetary policy response measures undertaken. In Chapter 3, we analyse the monetary policy decisions of the ECB (and other major CBs for comparison) and their effectiveness in achieving the declared policy goals in the short term. Chapter 4 is devoted to an analysis of the policy challenges which may be faced by the ECB and other major CBs once the pandemic emergency comes to its end. Chapter 5 contains a summary and the conclusions of our analysis.
Purpose: This paper tries to identify the wage gap between informal and formal workers and tests for the two-tier structure of the informal labour market in Poland.
Design/methodology/approach: I employ the propensity score matching (PSM) technique and use data from the Polish Labour Force Survey (LFS) for the period 2009–2017 to estimate the wage gap between informal and formal workers, both at the means and along the wage distribution. I use two definitions of informal employment: a) employment without a written agreement and b) employment while officially registered as unemployed at a labour office. In order to reduce the bias resulting from the non-random selection of
individuals into informal employment, I use a rich set of control variables representing several individual characteristics.
Findings: After controlling for observed heterogeneity, I find that on average informal workers earn less than formal workers, both in terms of monthly earnings and hourly wage. This result is not sensitive to the definition of informal employment used and is
stable over the analysed time period (2009–2017). However, the wage penalty to informal employment is substantially higher for individuals at the bottom of the wage distribution, which supports the hypothesis of the two-tier structure of the informal labour market in Poland.
Originality/value: The main contribution of this study is that it identifies the two-tier structure of the informal labour market in Poland: informal workers in the first quartile of the wage distribution and those above the first quartile appear to be in two partially different segments of the labour market.
The rule of law, by securing civil and economic rights, directly contributes to social prosperity and is one of our societies’ greatest achievements. In the European Union (EU), the rule of law is enshrined in the Treaties of its founding and is recognised not just as a necessary condition of a liberal democratic society, but also as an important requirement for a stable, effective, and sustainable market economy. In fact, it was the stability and equality of opportunity provided by the rule of law that enabled the post-war Wirtschaftswunder in Germany and the post-Communist resuscitation of the economy in Poland.
But the rule of law is a living concept that is constantly evolving – both in its formal, de jure dimension, embodied in legislation, and its de facto dimension, or its reception by society. In Poland, in particular, according to the EU, the rule of law has been heavily challenged by government since 2015 and has evolved amid continued pressure exerted on the institutions which execute laws. More recently, the outbreak of the COVID-19 pandemic transformed the perception of the rule of law and its boundaries throughout the EU and beyond (Marzocchi, 2020).
This Study contains Value Added Tax (VAT) Gap estimates for 2018, fast estimates using a simplified methodology for 2019, the year immediately preceding the analysis, and includes revised estimates for 2014-2017. It also includes the updated and extended results of the econometric analysis of VAT Gap determinants initiated and initially reported in the 2018 Report (Poniatowski et al., 2018). As a novelty, the econometric analysis to forecast potential impacts of the coronavirus crisis and resulting recession on the evolution of the VAT Gap in 2020 is reported.
In 2018, most European Union (EU) Member States (MS) saw a slight decrease in the pace of gross domestic product (GDP) growth, but the economic conditions for increasing tax compliance remained favourable. We estimate that the VAT total tax liability (VTTL) in 2018 increased by 3.6 percent whereas VAT revenue increased by 4.2 percent, leading to a decline in the VAT Gap in both relative and nominal terms. In relative terms, the EU-wide Gap dropped to 11 percent and EUR 140 billion. Fast estimates show that the VAT Gap will likely continue to decline in 2019.
Of the EU-28, the smallest Gaps were observed in Sweden (0.7 percent), Croatia (3.5 percent), and Finland (3.6 percent), the largest – in Romania (33.8 percent), Greece (30.1 percent), and Lithuania (25.9 percent). Overall, half of the EU-28 MS recorded a Gap above 9.2 percent. In nominal terms, the largest Gaps were recorded in Italy (EUR 35.4 billion), the United Kingdom (EUR 23.5 billion), and Germany (EUR 22 billion).
The euro is the second most important global currency after the US dollar. However, its international role has not increased since its inception in 1999. The private sector prefers using the US dollar rather than the euro because the financial market for US dollar-denominated assets is larger and deeper; network externalities and inertia also play a role. Increasing the attractiveness of the euro outside the euro area requires, among others, a proactive role for the European Central Bank and completing the Banking Union and Capital Market Union.
Forecasting during a strong shock is burdened with exceptionally high uncertainty. This gives rise to the temptation to formulate alarmist forecasts. Experiences from earlier pandemics, particularly those from the 20th century, for which we have the most data, don’t provide a basis for this. The mildest of them weakened growth by less than 1 percentage point, and the worst, the Spanish Flu, by 6 percentage points. Still, even the Spanish Flu never caused losses on the order of 20% of GDP – not even where it turned out to be a humanitarian disaster, costing the lives of 3-5% of the population. History suggests that if pandemics lead to such deep losses at all, it’s only in particular quarters and not over a whole year, as economic activity rebounds. The strength of that rebound is largely determined by economic policy. The purpose of this work is to describe possible scenarios for a rebound in Polish economic growth after the epidemic.
A separate issue, no less important, is what world will emerge from the current crisis. In the face of the 2008 financial crisis, White House Chief of Staff Rahm Emanuel said: “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.” Such changes can make the economy and society function better than before the crisis. Unfortunately, the opportunities created by the global financial crisis were squandered. Today’s task is more difficult; the scale of various problems has expanded even more. Without deep structural and institutional changes, the world will be facing enduring social and economic problems, accompanied by long-term stagnation.
"Many brilliant prophecies have appeared for the future of the EU and our entire planet. I believe that Europe, in its own style, will draw pragmatic conclusions from the crisis, not revolutionary ones; conclusions that will allow us to continue enjoying a Europe without borders. Brussels will demonstrate its usefulness; it will react ably and flexibly. First of all, contrary to the deceitful statements of members of the Polish government, the EU warned of the threats already in 2021. Secondly, already in mid-March EU assistance programs were ready, i.e. earlier than the PiS government’s “shield” program. The conclusion from the crisis will be a strengthening of all the preventive mechanisms that allow us to recognize threats and react in time of need. Research programs will be more strongly directed toward diagnosing and treating infectious diseases. Europe will gain greater self-sufficiency in the area of medical equipment and drugs, and the EU – greater competencies in the area of the health service, thus far entrusted to the member states. The 2021-27 budget must be reconstructed, to supplement the priority of the Green Deal with economic stimulus programs. In this way structural funds, which have the greatest multiplier effect for investment and the labor market, may return to favor. So once again: an addition, as a conclusion from the crisis, and not a reinvention of the EU," writes Dr. Janusz Lewandowski the author of the 162nd mBank-CASE seminar Proceeding.
Dla wielu rodaków europejskość Polski jest oczywista, trudno jest im nawet wyobrazić sobie, jak kształtowałyby się losy naszego kraju bez uczestnictwa w integracji europejskiej. Szczególnie młode pokolenie traktuje osiągnięty przez nas dzięki uczestnictwie w Unii ogromny postęp cywilizacyjny jako coś danego i naturalnego. Jednak świadomość tego, jaki był nasz punkt wyjścia, jaką przeszliśmy drogę i jak przyczyniły się do tego unijne działania oraz jakie wynikały z tego korzyści powinna nam stale towarzyszyć. Bez tej świadomości, starannego weryfikowania faktów i docenienia naszych osiągnięć grozi nam uleganie niesprawdzonym argumentom przeciwników integracji europejskiej i popełnienie nieodwracalnych błędów. Dla tych, którzy chcą poznać te fakty, przygotowany został raport "Nasza Europa. 15 lat Polski w Unii Europejskiej". Podjęto w nim ocenę 15 lat członkostwa Polski z perspektywy doświadczeń procesu integracji, z jego barierami i sukcesami, a także wyzwaniami przyszłości.
Raport jest wynikiem pracy zbiorowej licznych ekspertów z różnych dziedzin, od wielu lat analizujących wielowymiarowe efekty działania instytucji UE oraz współpracy z krajami członkowskimi na podstawie europejskich wartości i mechanizmów. Autorzy podsumowują korzyści członkostwa Polski w Unii Europejskiej na podstawie faktów, nie stroniąc jednakże od własnych ocen i refleksji.
This report is the result of the joint work of a number of experts from various fields who have been - for many years – analysing the multidimensional effects of EU institutions and cooperation with Member States pursuant to European values and mechanisms. The authors summarise the benefits of Poland’s membership in the EU based on facts; however, they do not hide their own views and reflections. They also demonstrate the barriers and challenges to further European integration.
This report was prepared by CASE, one of the oldest independent think tanks in Central and Eastern Europe, utilising its nearly 30 years of experience in providing objective analyses and recommendations with respect to socioeconomic topics. It is both an expression of concern about Poland’s future in the EU, as well as the authors’ contribution to the debate on further European integration.
Poland’s new Employee Capital Plans (PPK) scheme, which is mandatory for employers, started to be implemented in July 2019. The article looks at the systemic solutions applied in the programme from the perspective of the concept of the simultaneous reconstruction of the retirement pension system. The aim is to present arguments for and against the project from the point of view of various actors, and to assess the chances of success for the new system. The article offers a detailed study of legal solutions, an analysis of the literature on the subject, and reports of institutions that supervise pension funds. The results of this analysis point to the lack of cohesion between certain solutions of the 1999 pension reform and expose a lack of consistency in how the reform was carried out, which led to the eventual removal of the capital part of the pension system. The study shows that additional saving for old age is advisable in the country’s current demographic situation and necessary for both economic and social reasons. However, the systemic solutions offered by the government appear to be chiefly designated to serve short-term state interests and do not create sufficient incentives for pension plan participants to join the programme.
Belarus was among the few post-communist countries to resign from comprehensive market reforms and attempt to improve the efficiency of the economy through administrative means, leaving market mechanisms only an auxiliary role. Since its inception, the ‘Belarusian economic model’ has undergone several revisions of a de-statisation and de-regulation kind, but still the Belarusian economy remains dominated by the state. This paper analyses the characteristic features of the Belarusian economic system – especially those related to the public sector – as well as its evolution over time during the period following its independence. The paper concludes that during the post-Soviet period, the Belarusian economy evolved from a quasi-Soviet system based on state property, state planning, support to inefficient enterprises and the massive redistribution of funds to a more flexible hybrid model where the public sector still remains the core of the economy. The case of Belarus shows that presently there is no appropriate theoretical perspective which, in an unmodified form, could be applied to study this type of economic system. Therefore, a new perspective based on an already existing but updated approach or a multidisciplinary approach that incorporates the duality of the Belarusian economy is required.
Belarusian economy has been stagnating in 2011-2015 after 15 years of a high annual average growth rate. In 2015, after four years of stagnation, the Belarusian economy slid into a recession, its first since 1996, and experienced both cyclical and structural recessions. Since 2015, the Belarusian government and the National Bank of Belarus have been giving economic reforms a good chance thanks to gradual but consistent actions aimed at maintaining macroeconomic stability and economic liberalization. It seems that the economic authorities have sustained more transformation efforts during 2015-2018 than in the previous 24 years since 1991.
As the relative welfare level in Belarus is currently 64% compared to the Central and Eastern Europe (CEE) countries average, Belarus needs to build stronger fundaments of sustainable growth by continuing and accelerating the implementation of institutional transformation, primarily by fostering elimination of existing administrative mechanisms of inefficient resource allocation. Based on the experience of the CEE countries’ economic transformation, we highlight five lessons for the purpose of the economic reforms that Belarus still faces today: keeping macroeconomic stability, restructuring and improving the governance of state-owned enterprises, developing the financial market, increasing taxation efficiency, and deepening fiscal decentralization.
Inflation in advanced economies is low by historical standards but there is no threat of deflation. Slower economic growth is caused by supply-side constraints rather than low inflation. Below-the-target inflation does not damage the reputation of central banks. Thus, central banks should not try to bring inflation back to the targeted level of 2%. Rather, they should revise the inflation target downwards and publicly explain the rationale for such a move. Risks to the independence of central banks come from their additional mandates (beyond price stability) and populist politics.
Estonia has Europe’s most transparent tax system (while Poland is second-to-last, in 35th place), and is also known for its pioneering approach to taxation of legal persons’ income. Since 2000, payers of Estonian corporate tax don’t pay tax on their profits as long as they don’t realize them. In principle, this approach should make access to capital easier, spark investment by companies and contribute to faster economic growth. Are these and other positive effects really noticeable in Estonia? Have other countries followed in this country’s footsteps? Would deferment of income tax be possible and beneficial for Poland? How would this affect revenue from tax on corporate profits? Would investors come to see Poland as a tax haven? Does the Estonian system limit tax avoidance and evasion, or actually the opposite? Is such a system fair? Are intermediate solutions possible, which would combine the strengths or limit the weaknesses of the classical and Estonian models of profit tax? These questions are discussed in the mBank-CASE seminar Proceeding no. 163, written by Dmitri Jegorov, deputy general secretary of the Estonian Finance Ministry, who directs the country’s tax and customs policy, Dr. Anna Leszczyłowska of the Poznań University of Economics and Business and Aleksander Łożykowski of the Warsaw School of Economics.
The trade war between the U.S. and China began in March 2018. The American side raised import duties on aluminum and steel from China, which were later extended to other countries, including Canada, Mexico and the EU member states. This drew a negative reaction from those countries and bilateral negotiations with the U.S. In June 2018 America, referring to Section 301 of its 1974 Trade Act, raised tariffs to 25% on 818 groups of products imported from China, arguing that the tariff increase was a response to years of theft of American intellectual property and dishonest trade practices, which has caused the U.S. trade deficit.
Will this trade war mean the collapse of the multilateral trading system and a transition to bilateral relationships? What are the possibilities for increasing tariffs in light of World Trade Organization rules? Can the conflict be resolved using the WTO dispute-resolution mechanism? What are the consequences of the trade war for American consumers and producers, and for suppliers from other countries? How high will tariffs climb as a result of a global trade war? How far can trade volumes and GDP fall if the worst-case scenario comes to pass? Professor Jan J. Michałek and Dr. Przemysław Woźniak give answers to these questions in the mBank-CASE Seminar Proceeding No. 161.
This Report has been prepared for the European Commission, DG TAXUD under contract TAXUD/2017/DE/329, “Study and Reports on the VAT Gap in the EU-28 Member States” and serves as a follow-up to the six reports published between 2013 and 2018.
This Study contains new estimates of the Value Added Tax (VAT) Gap for 2017, as well as updated estimates for 2013-2016. As a novelty in this series of reports, so called “fast VAT Gap estimates” are also presented the year immediately preceding the analysis, namely for 2018. In addition, the study reports the results of the econometric analysis of VAT Gap determinants initiated and initially reported in the 2018 Report (Poniatowski et al., 2018). It also scrutinises the Policy Gap in 2017 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses.
More from CASE Center for Social and Economic Research (20)
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
NO1 Uk Rohani Baba In Karachi Bangali Baba Karachi Online Amil Baba WorldWide...Amil baba
Contact with Dawood Bhai Just call on +92322-6382012 and we'll help you. We'll solve all your problems within 12 to 24 hours and with 101% guarantee and with astrology systematic. If you want to take any personal or professional advice then also you can call us on +92322-6382012 , ONLINE LOVE PROBLEM & Other all types of Daily Life Problem's.Then CALL or WHATSAPP us on +92322-6382012 and Get all these problems solutions here by Amil Baba DAWOOD BANGALI
#vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore#blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #blackmagicforlove #blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #Amilbabainuk #amilbabainspain #amilbabaindubai #Amilbabainnorway #amilbabainkrachi #amilbabainlahore #amilbabaingujranwalan #amilbabainislamabad
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
NO1 Uk Divorce problem uk all amil baba in karachi,lahore,pakistan talaq ka m...Amil Baba Dawood bangali
Contact with Dawood Bhai Just call on +92322-6382012 and we'll help you. We'll solve all your problems within 12 to 24 hours and with 101% guarantee and with astrology systematic. If you want to take any personal or professional advice then also you can call us on +92322-6382012 , ONLINE LOVE PROBLEM & Other all types of Daily Life Problem's.Then CALL or WHATSAPP us on +92322-6382012 and Get all these problems solutions here by Amil Baba DAWOOD BANGALI
#vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore#blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #blackmagicforlove #blackmagicformarriage #aamilbaba #kalajadu #kalailam #taweez #wazifaexpert #jadumantar #vashikaranspecialist #astrologer #palmistry #amliyaat #taweez #manpasandshadi #horoscope #spiritual #lovelife #lovespell #marriagespell#aamilbabainpakistan #amilbabainkarachi #powerfullblackmagicspell #kalajadumantarspecialist #realamilbaba #AmilbabainPakistan #astrologerincanada #astrologerindubai #lovespellsmaster #kalajaduspecialist #lovespellsthatwork #aamilbabainlahore #Amilbabainuk #amilbabainspain #amilbabaindubai #Amilbabainnorway #amilbabainkrachi #amilbabainlahore #amilbabaingujranwalan #amilbabainislamabad
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Latino Buying Power - May 2024 Presentation for Latino CaucusDanay Escanaverino
Unlock the potential of Latino Buying Power with this in-depth SlideShare presentation. Explore how the Latino consumer market is transforming the American economy, driven by their significant buying power, entrepreneurial contributions, and growing influence across various sectors.
**Key Sections Covered:**
1. **Economic Impact:** Understand the profound economic impact of Latino consumers on the U.S. economy. Discover how their increasing purchasing power is fueling growth in key industries and contributing to national economic prosperity.
2. **Buying Power:** Dive into detailed analyses of Latino buying power, including its growth trends, key drivers, and projections for the future. Learn how this influential group’s spending habits are shaping market dynamics and creating opportunities for businesses.
3. **Entrepreneurial Contributions:** Explore the entrepreneurial spirit within the Latino community. Examine how Latino-owned businesses are thriving and contributing to job creation, innovation, and economic diversification.
4. **Workforce Statistics:** Gain insights into the role of Latino workers in the American labor market. Review statistics on employment rates, occupational distribution, and the economic contributions of Latino professionals across various industries.
5. **Media Consumption:** Understand the media consumption habits of Latino audiences. Discover their preferences for digital platforms, television, radio, and social media. Learn how these consumption patterns are influencing advertising strategies and media content.
6. **Education:** Examine the educational achievements and challenges within the Latino community. Review statistics on enrollment, graduation rates, and fields of study. Understand the implications of education on economic mobility and workforce readiness.
7. **Home Ownership:** Explore trends in Latino home ownership. Understand the factors driving home buying decisions, the challenges faced by Latino homeowners, and the impact of home ownership on community stability and economic growth.
This SlideShare provides valuable insights for marketers, business owners, policymakers, and anyone interested in the economic influence of the Latino community. By understanding the various facets of Latino buying power, you can effectively engage with this dynamic and growing market segment.
Equip yourself with the knowledge to leverage Latino buying power, tap into their entrepreneurial spirit, and connect with their unique cultural and consumer preferences. Drive your business success by embracing the economic potential of Latino consumers.
**Keywords:** Latino buying power, economic impact, entrepreneurial contributions, workforce statistics, media consumption, education, home ownership, Latino market, Hispanic buying power, Latino purchasing power.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
how can I sell my pi coins for cash in a pi APPDOT TECH
You can't sell your pi coins in the pi network app. because it is not listed yet on any exchange.
The only way you can sell is by trading your pi coins with an investor (a person looking forward to hold massive amounts of pi coins before mainnet launch) .
You don't need to meet the investor directly all the trades are done with a pi vendor/merchant (a person that buys the pi coins from miners and resell it to investors)
I Will leave The telegram contact of my personal pi vendor, if you are finding a legitimate one.
@Pi_vendor_247
#pi network
#pi coins
#money
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
3. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
The CASE Network is a group of economic and social research centers in Poland,
Kyrgyzstan, Ukraine, Georgia, Moldova, and Belarus. Organizations in the network regularly
conduct joint research and advisory projects. The research covers a wide spectrum of
economic and social issues, including economic effects of the European integration process,
economic relations between the EU and CIS, monetary policy and euro-accession,
innovation and competitiveness, and labour markets and social policy. The network aims to
increase the range and quality of economic research and information available to policy-makers
and civil society, and takes an active role in on-going debates on how to meet the
2
economic challenges facing the EU, post-transition countries and the global economy.
The CASE network consists of:
• CASE – Center for Social and Economic Research, Warsaw, est. 1991,
www.case-research.eu
• CASE – Center for Social and Economic Research – Kyrgyzstan, est. 1998,
www.case.elcat.kg
• Center for Social and Economic Research - CASE Ukraine, est. 1999,
www.case-ukraine.kiev.ua
• CASE –Transcaucasus Center for Social and Economic Research, est. 2000,
www.case-transcaucasus.org.ge
• Foundation for Social and Economic Research CASE Moldova, est. 2003,
www.case.com.md
• CASE Belarus - Center for Social and Economic Research Belarus, est. 2007.
4. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
3
Contents
Abstract...................................................................................................................................5
1. Introduction ........................................................................................................................6
2. International integration and domestic regions: Some recent research ......................8
3. The modeling approach..................................................................................................11
3.1. A synthetic European space ....................................................................................11
3.2. Scenarios and trade costs........................................................................................12
3.3. The choice of model..................................................................................................15
3.4. Properties of the wage gap model: Are wage effects and net export effects
similar?..............................................................................................................................17
4. Model simulation results .................................................................................................26
5. Concluding remarks.........................................................................................................29
References............................................................................................................................30
Appendix A: The modelling framework..............................................................................34
5. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
Arne Melchior (Ph.D., international economics, University of Oslo), b. 1953, is currently
Senior Research Fellow at the Norwegian Institute of International Affairs, Oslo, Norway,
where he has also served as Assistant Director and Head of Department. Earlier professional
experience includes work with international trade negotiations for the Norwegian
government. Main research interests include:
- Trade, trade policy, regional integration and trade preferences, in Europe and worldwide.
- Spatial economics and domestic regional issues, e.g. in Europe, India and China.
- Entry barriers and sunk costs in foreign trade, e.g. in the IT sector.
- International income distribution and inequality.
In most fields, theoretical as well as empirical work has been undertaken. Melchior has
experience as an advisor domestically and for international institutions, and from teaching at
various universities. For selected publications, see
http://www.nupi.no/IPS/?module=Articles;action=Article.publicShow;ID=259.
4
6. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
5
Abstract
Does European economic integration create more inequality between domestic regions, or is
the opposite true? We show that a general answer to this question does not exist, and that
the outcome depends on the liberalisation scenario. In order to examine the impact of
European and international integration on the regions, the paper develops a numerical
simulation model with nine countries and 90 regions. Eastward extension of European
integration is beneficial for old as well as new member countries, but within countries the
impact varies across regions. Reduction in distance-related trade costs is particularly good
for the European peripheries. Each liberalisation scenario has a distinct impact on the spatial
income distribution, and there is no general rule telling that integration causes more or less
agglomeration.
7. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
6
1. Introduction*
How does European integration affect domestic regions? This question is urgent not
only for those directly affected but also for policy makers: regional support constitutes a main
component of the common policies of the European Union. In the 2007-2013 Financial
Framework of the EU, 36% of total funds is allocated to such “cohesion activities”.1 While
Greece, Ireland, Portugal and Spain were the main beneficiaries of EU regional support
during the years preceding the 2004 enlargement, regions in the new member states have
now taken over this role.
On this background, it is of considerable interest to know whether integration as such
tends to widen or narrow the core-periphery gaps inside countries. If the latter was to be true,
European integration would by itself be a good regional policy, and the case for budget
support would be weaker. Ederveen et al. (2006) find that EU structural funds are only
effective in regions that are open or have good institutional quality. For EU policy, especially
in the context of the EU Neighbourhood Policy (see e.g. Dodini and Fantini 2006), an urgent
issue is whether there is an “agglomeration shadow” whereby regions outside the enlarged
EU are worse off.
A growing body of evidence (see e.g. World Bank 2000, Römisch 2003, Landesmann
and Römisch 2006) suggests that regional inequality is on the rise in new member states.
According to a recent comprehensive assessment (Melchior 2008a) covering 36 countries in
Europe and beyond, there is no doubt: During 1995-2005, there was a substantial increase in
domestic regional inequality within all Central and Eastern European countries. Given that
East-West European free trade agreements and EU enlargement has been implemented
during the last decade, an issue is therefore whether integration as such has been a cause
for the observed increase in regional inequality. Or is it, on the contrary, the case that
European integration promotes regional convergence within countries?
Existing research provides no clear answers about whether international integration
promotes convergence or divergence between domestic regions. In section 2, we review
some empirical work as well as some recent theoretical contributions within the new
economic geography (NEG) and conclude that the answer to our main question is
ambiguous in terms of theory as well as empirics. In this paper, we argue that there is no
* I thank Maryla Maliszewska, Fredrik Wilhelmsson and Konstantin Gluschenko for useful comments to an earlier
draft. The paper was written as part of the research project ENEPO – European Eastern Neighbourhood –
Economic Potential and Future development. Financial support from EUs 6th Framework programme (contract
028736) and the Norwegian Research Council is gratefully acknowledged.
1 See http://ec.europa.eu/budget/reform/budget_glance/what_for_en.htm.
8. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
general answer to this question, and searching for such a general rule is barking under the
wrong tree.
As an illustration, some of our results suggest that East-West regional integration will
have an uneven impact on western and eastern regions within former member states and the
new members. In the new member states, for example, western regions may be more
stimulated by integration. Whether this contributes to more or less regional inequality,
depends on the initial pattern of regional inequality. Furthermore, we show that the east-west
impact of integration is quite different with other forms of international trade integration, for
example multilateral trade liberalization of the WTO (World Trade Organization) type, or
reduction in distance-related trade costs (such as transport costs). Hence the impact of
international integration on domestic regional inequality depends on the type of integration as
well as the initial income distribution. European regions have been affected by various stages
of European integration, multilateral integration through WTO, and reductions in transport
costs. We cannot expect that all these forms of integration have similar effects on domestic
regions.
In order to address such integration effects, we should not only ask whether there will
be spatial agglomeration of economic activity, but where this agglomeration will be. Will
international integration stimulate growth in the north, south, east or west of a country, or its
central areas? In order to address such issues, we need models of sufficient dimensionality:
with a sufficient number of countries, and with distinct regions within each country. In trade
theory and the new economic geography (NEG), the issues have mainly been addressed
using low-dimensional models with three or four regions (see Section 2 for references). Many
questions about European integration and domestic regions can however not be addressed
within such models. Concluding their survey of the new economic geography (NEG), Fujita
and Mori (2005) consider the development of higher-dimensional spatial models as one of
the top priorities for future research in the field.2
The ambition in this paper is therefore to develop a higher-dimensional model for the
study of European integration, in order to highlight the issue and develop a platform for
empirical work in the field. In this way, we try to move from economic geography to
geographical economics, by developing a model that is directly applicable to the empirical
analysis of spatial development patterns in Europe. As another contribution in a related field,
Stelder (2005) uses a large-scale NEG model to examine the location of cities in Europe.
Except for this contribution we are not aware of similar large-scale models, although some
regional CGE (Computable General Equilibrium) models may be partly related although
2 The authors list four priority areas, and the others were; (i) unifying urban economics and NEG, (iii) better
modeling and empirical understanding of transport costs and how it affects agglomeration, and (iv) exploring the
impact of spatial knowledge spillovers.
7
9. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
these are mainly focusing on the national level only (see e.g. Bröcker and Schneider 2002).
Multi-regional modeling has certainly been used also in the NEG context; see e.g. Fujita et
al. (1999), but then mainly to answer questions about “whether” there will be agglomeration.
In the current paper, we extend this by focusing more on the “where” question, and derive
implications that can be applied to the map and used directly in the empirical study of
geographical patterns of change in Europe. For example, we ask whether integration will
have different impact in the west and in the east, within Europe as a whole and within each
country.
In Section 2, we survey some recent research in the field. In Section 3, we discuss
and motivate the theoretical modeling approach chosen and define the integration scenarios
to be examined. We present the technical properties of the theoretical model and examine
the behaviour of the model in a low-dimensional setting, before proceeding to the higher-dimensional
numerical simulations. In section 4, we present the results from the modeling of
various stages of regional and international integration affecting European regions. Some
concluding remarks are presented in Section 5.
8
2. International integration and domestic regions: Some recent
research
The new economic geography (NEG) (see Ottaviano and Thisse 2004 or Fujita and
Mori 2005 or Fujita et al. 1999 for overviews, or Puga 1999 for a synthesis of some core
models) provides a new micro-foundation for examining regional inequality. Some NEG
contributions have also examined the relationship between international integration and
domestic inequalities. In models of economic geography there is typically a centrifugal force
working against agglomeration, and a centripetal force promoting a more uneven core-periphery
pattern. Appearing in various shapes and embedded in different models, the
standard engine for agglomeration is often the so-called “home market effect” demonstrated
by Krugman (1980): Industries with economies of scale and imperfect competition tend to be
located where market access is better. In Krugman (1980) it was the home market that
created better market access, but it may also be a more favourable geographical location.
If workers are allowed to migrate in response to real wage differences, as in Krugman
(1991), it amplifies market size differences, and regional inequality will increase. In this
model, the centrifugal force is that workers in the “agricultural” sector are immobile and
10. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
maintain an incentive to locate firms close to peripheral demand. Allowing labour to migrate
between domestic regions but not internationally, it may then be studied how migration and
domestic agglomeration is affected by international trade integration. Within such a
framework, Paluzie (2001) and Monfort and Nicolini (2000) find that international
liberalisation makes domestic agglomeration more likely. Monfort and Ypersele (2003)
obtained similar results in a model without labour migration but with vertical linkages between
industries. It is well known in the new economic geography literature (see e.g. Puga 1999)
that the NEG labour migration model and the model with vertical inter-industry linkages of
Krugman and Venables (1995) produce rather similar results.
The results outlined above are derived in models where domestic regions are
symmetrically placed related to foreign countries or region, so there is no geographical core-periphery
pattern. Crozet and Sobeyran (2004) also examined the asymmetric case where
one domestic region is closer to the outside world. Now the conclusion about integration and
regions is reversed: International integration promotes development in the border region.3 A
similar conclusion was obtained by Krugman and Livas Elizondo (1996), who replace the
centripetal force working against concentration: When agglomeration is dampened by
domestic congestion costs instead of immobile farmers, international integration also leads to
less domestic concentration.4
What is the intuition behind these results? International integration makes intra-national
trade less important and this weakens the forces for concentration as well as for
dispersion:
- It weakens the “monopoly” of the domestic core region by facilitating the periphery’s trade
with the outside world, and this may promote convergence. The intuition may also be
expressed as follows: It is borders that create the backwardness of some border regions,
and when borders are made less important, domestic core-periphery patterns are
weakened.
- On the other hand, increased demand from abroad also strengthens the incentive for
agglomeration. In models where domestic real wage differences are ruled out since they
lead to labour migration, international integration is then more likely to produce
agglomeration.
3 Another contribution considering spatial asymmetries, regions and international trade is Behrens et al. (2006).
Using a model with two countries each having two regions, they show, among other things, how the probabilities
of agglomeration in the two countries are interdependent.
4 See also Alonso-Villar (2005). Behrens (2003) also shows that some of these results depend on the Dixit-Stiglitz
modelling approach where the firms’ mill prices are unaffected by trade costs and changes in competition. If
changes in competition lead to changes in prices, the share of trade costs in total costs may change, and this may
change the results.
9
11. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
From the still limited amount of theoretical research on this issue, it is therefore ambiguous
whether international integration promotes convergence or divergence between domestic
regions.
This ambiguity also applies to empirics. Some evidence indicates that international
integration leads to more inequality: Summing up the results from a large-scale United
Nations research project, Kanbur and Venables (2007, 209) conclude that “trade has on
balance increased spatial disparities”. Hanson (see e.g. Hanson 2003) has examined the
impact of NAFTA on wages in Mexico and found that integration led to greater regional wage
dispersion but a gain for more skilled labour close to the U.S. border.5 Egger et al. (2005)
found that export openness increased regional inequality with respect to real wages in
Central and Eastern Europe. This evidence is important; it is however not a direct test of the
mechanisms described in the theoretical models above.
On the other hand, there is also evidence suggesting that international integration
promotes regional convergence:
- Crozet and Soubeyran (2004) interpret their evidence about labour migration in Romania
as support for the hypothesis that European integration has been to the advantage of
border regions, as predicted by their model.
- Redding and Sturm (2005) found that the division of Germany during 1945-1990 had a
particularly negative impact on border regions; thus indicating that disintegration
contributed to stronger core-periphery pattern. They also found signs of recovery for
border regions after reunification.
Hence also empirically, some contributions suggest convergence and others divergence.6
Based on earlier research, the impact of international integration on domestic regions is
therefore ambiguous theoretically as well as empirically.
Except for the border region of Crozet and Soubeyran (2004), the theoretical models
referred to above are essentially similar to trade bloc models containing three or four regions,
with a limited spatial structure. It is therefore of interest to examine the issue in models where
geographical location and distance plays a larger role. In order to obtain this, one needs
greater dimensionality. Melchior (2000), using a 49-region multilateral version of the home
market effect (HME) model of Krugman (1980), distinguishes between “spatial” trade costs
(such as transport costs) and non-spatial trade costs (such as tariffs) and found that “spatial
liberalisation” tends to promote more centralisation, while reductions in non-spatial trade
costs tend to have the opposite effect. The distinction between spatial and non-spatial trade
costs is also examined by Behrens et al. (2007), who study agglomeration effects with gated
5 According to Aroca et al. 2005), it was stagnation in South Mexico rather than prosperity in North Mexico that
caused the divergence in incomes.
6 Some research focuses on other variables; e.g. that international integration promotes more similar export
structures; see Beine and Coulombe (2007)and Crespo and Fontoura (2007).
10
12. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
regions, and it will be an important element in the modelling undertaken here. Spatial trade
costs allow the forces of geography and distance to work properly, while non-spatial costs
allow the modelling of countries and trade blocs. When the two types are combined, one
generally obtains effects that are distinct from those that apply with each of them alone.
11
3. The modeling approach
3.1. A synthetic European space
In the theoretical analysis, we use a two-dimensional rectangular grid of 9 countries
divided into 90 regions. Diagram 1 illustrates this “synthetic” European space:
Diagram 1: A stylised European space with 90 regions
7
6
5
4
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Longitude
Latitude
W1
W2 W4
C1
C2
E1
E2
W3
E3
In the diagram, each dot represents a region of equal size in terms of population or labour
force. Eight of the countries have nine regions each, while the last North-East country, E3,
has 18. While the map is highly stylized, the idea is to capture aspects of the true European
space. The four countries W1-W4 to the left represent the “old EU” or Western Europe
whereas C1-C2 represent the “new members” or Central Europe. Eastern Europe is
represented by E1-E3, of which one (E1) is a large, long and narrow country which is meant
to capture some dimensions of Russia. E2 could in terms of geographic position resemble
Turkey or Ukraine and E3 might represent Eurasian countries further east. The 90-region
landscape has distinct North-South and even more East-West dimensions; there is a
13. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
sufficiently rich regional structure inside each country, and we have a sufficient number of
countries to study different integration scenarios, and their impact on insiders and outsiders.7
The map in Diagram 1 captures some aspects of the true European space but we should
nevertheless be aware of the limitations:
- There is no outside world so the model will tend to overestimate the isolation of regions at
the borders of the landscape. Given that e.g. regions in the Russian Far East is now
benefiting from more intensive trade with China, USA and others, this is a limitation.
- The landscape is stylized and misses many features of true geography, which has more
countries, oceans, lakes, mountains, climatic differences and so on. For example, the
results for “W1” may not be appropriate in order to assess the impact of European
integration on Nordic regions. The North-South dimension is limited and allows limited
analysis of e.g. EU enlargement towards the South and North. This is a deliberate choice
since our focus here is particularly on the East-West dimension.
Neary (2001, 551) also calls for two-dimensional extensions of NEG models but fears they
will be “long on trigonometry and short on elegance”! With a richer landscape it is inevitably
the case that the effects and results are also more complex. By choosing the rectangular grid
rather than true geography, it is nevertheless easier to see the principal results in a stylized
way. In order to show how the core model affects the results, we shall also proceed in two
steps, by exploring the model properties in a low-dimensional setting before proceeding to
the 90-region landscape.
12
3.2. Scenarios and trade costs
A core feature of the approach used here is that we include some trade costs that are
a function of distance, and others that are independent of distance. We call the first spatial
trade costs, and the second non-spatial. As shown by Melchior (2000); when the two types
are present simultaneously one obtains effects on the spatial distribution of activity or
incomes that are not present when each is considered in isolation. We may think of
spatial trade costs as transport costs, but it could also be the case that policy-shaped
barriers or regulations have a spatial dimension. For example, if geographical distance also
reflects institutional similarity it could be that standards and regulations are more similar in
countries and regions that are close to each other and their protective impact could then be
correlated with distance. The relationship between transport costs and distance is also not
7 Before choosing this format, we also experimented with a more geographically realistic approach using up to
more than 500 regions, using true regional map coordinates. It is however an illusion that the model is much more
realistic even if the coordinates are true: After all, it is only theory. With a more stylised landscape, it is easier to
interpret the results and we avoid some technical computation problems that are present in models with larger
scale and variable region size.
14. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
straightforward: while e.g. the costs of road transportation in Europe may be monotonously
increasing with distance, this may not be so clear for long-distance sea freight. Similarly, we
may think of trade policy barriers as non-spatial and this is certainly the case for e.g. a Most-
Favoured Nation (MFN) tariff applying to all countries. But if countries form trade blocs with
their neighbours only, there may also be a correlation between trade policy barriers and
distance. In the analysis here, trade costs represent distribution costs in general, and it is an
empirical issue which trade costs are spatial and non-spatial. In the European context, the
European internal market is a large-scale project containing thousands of reforms, of which
some may be spatial and others non-spatial.
In the model simulations, trade costs always include a spatial as well as a non-spatial
component:
- Spatial trade costs are present within as well as between nations. We use the notation
dij=βd*Dij/Dmax. Here Dij is the “geographical” distance in Diagram 1; varying from one
between adjacent regions up to the maximum, Dmax≈14.03. We divide by Dmax so the
right hand side ratio is maximum equal to one. βd is a scaling factor, which we use to
scale up or down the magnitude of spatial trade costs.
- We assume that there are non-spatial trade costs present between all regions, also within
nations. We use three levels; within nations (tdomestic), between regions in different nations
but within the same trade bloc (trta, where the rta subscript refers to some regional trade
agreement), and between regions in different nations that have made no special
integration agreement (tmfn, where mfn refers to Most Favoured Nation). We always
assume tdomestic<trta<tmfn and for simplicity we let the level for regional integration be mid-way
between the domestic and MFN barriers. If we had allowed tdomestic=trta countries
would not exist any more. Since international trade costs are always higher than the
domestic ones, countries continue to matter in all scenarios.
We will simulate the following ten scenarios:
1. A base case without any regional integration agreements (BASE). The results are not
reported in detail, but it is used as a yardstick for comparing the results of regional
integration.
2. Western integration (WEST): A regional integration agreement is formed among the four
countries to the west (W1-W4). This is meant to represent the earlier stages of integration
in Western Europe.
3. Iron curtain (IRON): Prohibitive barriers are erected between WEST countries and the
rest. By reversing the sign of the predicted effect, we check the impact of the fall of the
iron curtain.
4. West-Central integration (WIDER): The Central European countries C1 and C2 are
added to the regional integration scheme. This intended to capture aspects of the
13
15. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
eastward extension of European integration; through various free trade agreements and
finally EU enlargement.
5. Multilateral integration (WTO): We examine the impact of changes in tmfn, with no
changes in the other trade cost components. This sheds light on the impact of multilateral
liberalization and also “preference erosion” whereby the intra-European preference
margin is reduced.
6. Eastern integration (EAST): We examine the impact of integration between the three
countries to the east; E1-E3. This may be relevant for discussing the dissolution of the
Soviet Union as well as current integration efforts within CIS (the Commonwealth of
Independent States).
7. Reduced transport costs (SPATIAL): We examine the impact of reduced spatial trade
costs, while all other trade costs remain unchanged. In this way, we check how regions
could be affected by the “death of distance”, or more realistically a reduction in its costs.
8. Further eastward extension of integration (EAST-WEST): E2 joins the regional integration
agreement and we examine the national and regional impact. This could be relevant for
assessing further EU enlargements or free trade agreements to the South East, e.g. with
Ukraine or Turkey.
9. Unilateral liberalization in the East (EASTOPEN): We explore the impact of unilateral
liberalization in an eastern country (E2). In this case we simulate the outcome with
initially trade costs higher than tmfn; and the impact of reducing these to tmfn. Transition
and WTO membership have led to a significant reduction in trade costs in some Eastern
European countries, and this scenario is intended to capture such changes.
10. Capital region dominance (CAPITAL): In Central and Eastern Europe there has been
faster growth in capital regions and a potential explanation is that some nations have a
hub-and-spoke pattern where the capital is a hub. We try to capture this by assuming that
half of the trade of regions in the three eastern countries E1-E3 has to pass through their
capital. We may think of this literally as if goods have to be transported via the capital, or
– perhaps more plausibly – that other aspects of distribution and sales are related to the
capital. In order to model this, we designate capitals based on the outcome of earlier
simulations and recalculate the matrix of trade costs. We use the three eastern countries
as illustrations, but have no à priori prediction about where such capital hub effects are
relevant. Brülhart and Koenig (2006) tested what they called the “Comecon hypothesis”
and found that for wages and service employment, capital regions in five of the new EU
member states (with respect to the 2004 enlargement) were better off. Hence this
scenario may potentially be relevant also for Central European countries. In Melchior
(2008a) it is shown that higher regional inequality invariably corresponds to a larger
14
16. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
income gap between capital regions and the country average, and this applies to Central
as well as Eastern European countries.
15
3.3. The choice of model
Models of the new trade theory and NEG are well-suited for our purpose since in such
models, industrial location or income levels are affected by market access. The archetype
version of this argument is the “home market effect” (HME) model of Krugman (1980): In this
model, large countries tend to be net exporters with respect to a “manufacturing” sector with
scale economies, monopolistic competition and trade costs. While most models of the new
trade theory and NEG have shared this focus on net export effects, Krugman (ibid.)
demonstrated that market access could alternatively show up in the form of nominal wage
differences rather than net trade effects. In their survey of empirical work on the new
economic geography, Head and Mayer (2004, 2663) conclude that the relationship between
market access and wages is more robustly supported than the relationship between market
access and the structure of production. Empirical research therefore strengthens the case for
models with endogenous wages rather than net trade effects. In this paper, we therefore
depart from Krugman’s idea about nominal wage effects and develop a multilateralised
version which we call the “wage gap model”. In the analysis, we compare this to a multilateral
version of the HME model and argue that the wage gap model is indeed a plausible
alternative.
A multilateral version of the HME model was applied to the analysis of spatial
inequality by Melchior (1997, 2000) or more recently Behrens et al. (2005, 2007).8 In the
multi-region setting, the HME model has the advantage of simplicity: It has a simple matrix-form
solution so numerical exercises can be carried out with little technical difficulty. Hence
the model has some of the virtues requested by Fujita and Mori in their quest for developing
high-dimensional models (2005, 396); “A most desirable model would be one that has
solvability at the low dimensional setup and computability even at the fairly high dimensional
setup.” The drawback, however, is that for the HME model, a solution with positive
production in all regions only exists within a restricted range of parameter values. Helpman
and Krugman (1985, Chapter 10.3) showed that even in the two-region case, the range with
positive production in both regions is limited in the HME model. In the case with many
regions, this problem is severely aggravated. The implication for numerical modeling is that
8 In addition to the “manufacturing” sector referred to above, there is a numeraire sector which is freely traded at
zero cost and produced with constant returns to scale. When labour is the only factor of production, free trade
with the numeraire good equalizes wages in all regions/countries (provided they all produce that good). With no
nominal wage differences, any advantage in market access or home market size is reflected in larger production
in the differentiated goods sector. Since large countries obtain a more than proportionate share of production, we
obtain the HME effect.
17. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
the model is “sustainable” only for quite high levels of trade costs, limited region size
differences, and a high elasticity of substitution. This severely limits the applicability of the
HME model in high-dimensional modeling. Another limitation of the HME model is the
somewhat arbitrary assumptions about the numeraire sector. This sector is sometimes
referred to as “agriculture”, but it is empirically not very plausible that there is completely free
trade for agriculture but not manufacturing. As shown by Davis (1998) (and discussed further
in Fujita et al. 1999, Chapter 7), the HME disappears if trade costs are equal in the two
sectors. 9 In spite of these limitations of the HME model, the model demonstrates in an
extreme form a powerful mechanism that is present also in other models and crucial in the
whole NEG literature.
Based on these arguments, we choose in this paper to develop an alternative model
with endogenous wage differences instead of net export effects. Following Krugman (1980)
and dropping the numeraire sector in the HME model, we obtain a model where wage
differences are driven by differences in market access. Dispensing with sector differences
and collapsing the economy into one sector, using one sector and one factor of production
only, we can think of this as a “sector average” for the economy. To this we may later add
other features: Sector differences in trade costs or technology, adding more production
factors and so on. 10 Ideally, we would like to have net trade effects as well as wage effects
simultaneously, but – given the dimensionality of the model – we start with wage effects only.
We call this the wage gap model since differences in market access are reflected in
the form of different nominal and real wages. While this is our main approach, we shall also
retain the HME model as part of the analysis and compare the two models: Are the wage
effects in the wage gap model just a mirror of the net export effects in the HME model? As
we shall see, this is sometimes but not always the case.
An alterative choice might have been to use NEG models along the lines of Krugman
(1991) or Krugman and Venables (1995). While these models have some interesting
properties, they generally generate multiple equilibria and even in the simple two-region case
the analysis of stability can be demanding. For the purpose at hand, with 90 regions, we
deliberately avoid models with multiple equilibria.11 With many possible equilibria and no
yeardstick to choose between them, it may be difficult to evaluate the results coming from
9 Also if we replace the numeraire sector with another “Dixit-Stiglitz sector” with trade costs, the HME effect may
disappear and the pattern of specialization and trade will depend on differences in elasticities and trade costs
across the two sectors. As shown by Venables (1999) in a two-dimensional setting (a circular plain), a complex
“chess-board-like” pattern of alternating specialization may then occur.
10 For example, the model of Markusen and Venables (1998) adds a Heckscher-Ohlin type supply-side to the
HME model so that market access differences will affect wages as well as net exports. Exploring how this model
performs in a higher-dimensional setting is a task for future research. In a higher-dimensional setting, the
technical challenge increases with the number of unknowns, e.g. two factor prices for each country rather than
one.
11 With two regions, we obtain bifurcations and the well-known “Tomahawk diagram” (see e.g. Fujita et al. 1999,
68). With 90 regions, “star wars” would be a possibility!
16
18. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
numerical simulations. For the purpose of analyzing European regional income distributions,
we are also interested in a model which allows for a continuum of possible outcomes rather
than catastrophic agglomeration in one region. European peripheral regions are generally not
empty, but they have lower nominal and real incomes and we would like the model to capture
this. Nevertheless, our choice is mainly for technical reasons and an interesting extension
might be to develop more multi-region application of the NEG models with ad hoc dynamics,
labour migration or externalities.
17
3.4. Properties of the wage gap model: Are wage effects and net
export effects similar?
In Appendix A, the technical details of the model are presented. Here we shall
illustrate some of the properties of the model. We start by examining the model in a low-dimensional
setting, before proceeding to the 90-region simulations.
Some basic properties of the wage gap model are:
- Since there is only one sector in the economy overall trade has to be balanced so there is
only intra-intra-industry trade.12
- Given that trade is balanced, domestic consumption and production of the differentiated
goods must be equal. For this reason, the number of firms will be proportional to country
size.
- Wage levels will however differ and for this reason the value of production and
consumption will also differ across countries.
- Welfare is equal to the nominal wage divided by the price level; i.e. for region i per capita
welfare will be Xi=wi/Pi. Regions with a favourable location close to markets will have
lower price levels. In general, we will see from the results that effects via the price levels
are larger than the nominal wage changes.
In Appendix A, we also include the HME model as a parallel case which we use as a
yardstick for comparison and a useful contrast that sheds light on the results. In the following,
we shall also compare the two models since it usefully sheds light on how net export effects
and wage effects may differ. Given that net export effects play a key role in most NEG
models, this exercise has broader relevance.
Does the wage gap model live up to the requirement of low-dimensional solvability
and high-dimensional computability? Based on our experience, the answer is generally yes
with respect to computability. The model has a solution although we cannot guarantee that it
has always a positive and real solution for all possible parameter values. In the simulations
12 We cannot exclude “triangular” trade so that there is a trade imbalance bilaterally, but aggregate trade always
has to be balanced.
19. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
undertaken, the model was well-behaved with positive solutions. Hence the model seems
well-behaved in terms of computability. Solvability for low dimensions is trickier: Although an
explicit analytical can be found for the case of two regions and with the elasticity of
substitution ε=2 (see end of Appendix A), this solution is not very user-friendly and one has
to use numerical methods to check its properties.
As a first illustration, we may use this analytical solution for two regions in order to
shed some light on the properties of the wage gap model. In Diagram two, we assume that
region 1 is twice as large as region 2; i.e. the labour endowment ratio L=L1/L2=2. Diagram 2
shows the wage ratio w1/w2 when trade costs are varied. In this low-dimension case, there is
only one type of trade costs, t12=t21=t.
18
Diagram 2: Trade liberalisation and the wage ratio
1.3
1.25
1.2
1.15
1.1
1.05
1
1 1.5 2 2.5 3 3.5 4
Trade costs
Wage ratio
Here trade costs vary from zero (t=1) and 300% (t=4). At high levels of trade costs, we can
(using the expression for w in Appendix A) find that the wage ratio converges to L1/3; in this
case approximately 1.26. When trade costs are lowered, the wage gap is gradually
eliminated. Some implications of this are:
- In the two-region case, reduction in trade costs reduces the wage difference between
large and small countries/regions. There is a monotonous relationship and not an
“inverse U” relationship as in some NEG models. Hence this is a NEG model without
bifurcations.
- For a given size distribution of regions, there is an upper bound on the nominal wage
inequality when t increases; in the case with two regions and ε=2 it is equal to L1/3.
Observe however that since the limit value is a function of L, there is no upper limit on the
wage ratio when L increases.
- The HME model has the paradoxical property that while agglomeration is created by
differences in market access, the effect becomes stronger when these differences are
reduced. In this sense the wage gap model is more plausible: Trade liberalization
reduces the wage gap. Furthermore, the difference between price indexes must also be
20. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
reduced when differences in market access disappear, so liberalization will lead to
converging welfare levels. Hence small countries must gain more from trade
liberalization, while in the HME model the welfare gain from liberalization is proportional
across countries.
- Compared to the HME model, the wage gap model is well-behaved with positive
solutions for a larger range of parameter values. Although negative and complex roots
can also be observed, the problem is marginal compared to the HME model.
According to this first check, it therefore appears that the wage gap model is more plausible
then the HME model, by being better-behaved and by eliminating the paradoxical outcomes
of the HME model at low levels of trade costs.
In order to examine further some properties that are relevant for spatial modeling, we
next compare the two models using a “Hotelling” world where regions of equal size are
dispersed evenly along a line. If trade costs are increasing exponentially with distance in this
setting; i.e. tij=t|i-j| where t>1 is the trade cost between adjacent regions, and i and j denote
the positions along the line, i,j=1,..,N, the HME model has a simple analytical solutions for an
arbitrary number of regions (see Melchior 1997, Chapter 3). With no migration, demand from
the peripheries (ends of the line) represents the centrifugal force, and the manufacturing
clusters are located in the regions next to the periphery. Diagram 3 illustrates such a HME
model, using ε=5 and t=1.5. In Diagram 4, we illustrate the wage gap model for the same set-up,
19
using numerical simulation.
Diagram 3: 7-region HME model
1.6
1.4
1.2
1
0.8
1 2 3 4 5 6 7
Regions
Firms Welfare
Diagram 4: 7-region wage gap model
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1 2 3 4 5 6 7
Regions
Welfare Wage Dom. sales
The HME model (Diagram 3), produces a duocentric or bipolar pattern of manufacturing
agglomeration, where regions 2 and 6 have higher levels of “manufacturing” production, and
the peripheral regions 1 and 7 lower. The central regions 3-5 have average levels of
production (=1/N), but they have a better geographical location and therefore the welfare
levels of regions 2 through 6 are equal. In this model, reduction of trade costs leaves
21. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
production in the central regions unaffected but increases the gap between regions 2,6 and
1,7. For sufficiently low trade costs, the peripheral regions 1,7 will be deindustrialised.13
Now consider the wage gap model to the right, in Diagram 4. It produces a smooth
monocentric core-periphery pattern without distinct agglomerations. Nominal wages (the
curve in the middle) are slightly higher in the central regions, but price levels are also lower
so the welfare (real wage) gaps are even higher. The “duocentric” pattern is however visible
in the lowest curve for domestic sales: Due to lower wages in the peripheral regions, and
lower price levels in the central regions, regions 2 and 6 now export less and become more
closed, with a higher share of production sold domestically. This is diametrically opposite to
the HME model where the 2,6 regions are “big traders”.
In the two models, the welfare results are similar in the sense that they are both
monocentric. This may indicate that welfare predictions may be considered as more robust
and less dependent on modeling assumptions than predictions about agglomeration or wage
changes. To some extent, we may be more agnostic about whether the main impact is on the
net trade pattern or income as long as the welfare effects are more comparable.
For empirical analysis, a useful property of the wage gap model is that it offers
predictions about nominal variables: nominal wage effects may differ from welfare results
and frequently, price level effects are more important than nominal changes and appropriate
handling of the real/nominal distinction may be quite important. Nominal changes are not
“nuisance” that should be cleaned away to approach the real things; they may be important
for understanding change.
Using simulations with the HME model, Melchior (2000) found that the relative
magnitude of “spatial” and “non-spatial” trade costs determined whether a duocentric or (in a
two-dimensional model) “manufacturing belt” outcome occurred, or a more centralized
outcome. With a higher level of non-spatial trade costs, a centralized pattern may be the
outcome even in the HME model. In order to illustrate this, we add a non-spatial trade cost
that applies to sales to all other regions, together with the spatial or transport-cost type of
trade costs. We then examine what happens when either type of trade costs is changed.
Diagrams 5 and 6 show the outcomes in the HME model (the number of firms) and the wage
gap model (the nominal wage), respectively.14
13 When tε-1=2 the peripheral regions will have zero production. For example, with ε=5 the peripheries will be de-industrialised
20
for t lower than 1.19.
14 In both diagrams we use ε=5, spatial trade costs that are 1/6*distance (i.e. =100% between the peripheral
regions which have distance 6), and in the “high” curve in the graph non-spatial trade costs=0.2 for sales in all
regions except own region. Hence spatial trade costs now increase linearly with distance. Total trade costs with
other regions are then 1+1/6*distance+0.2. In Diagram 6 non-spatial trade costs=0 for the “low” curve. With these
value, however, regions 1 and 7 obtain negative production in the HME model, so in Diagram 5 we use non-spatial
costs at 0.05 for the “low” curve.
22. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
21
Diagram 5: Non-spatial trade costs in the
HME model: Levels of production
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1 2 3 4 5 6 7
Regions
Firms
Low
High
Diagram 6: The impact of non-spatial
trade costs in the wage gap model:
Nominal wage
1.03
1.02
1.01
1
0.99
0.98
0.97
0.96
0.95
1 2 3 4 5 6 7
Regions
Nominal wage level
Low
High
In both cases, the introduction of non-spatial trade costs creates a more even distribution. In
the HME model, there is a radical change from the duocentric to a monocentric pattern of
agglomeration, and the sharp inequality between the two regions at each end of the line and
the rest has disappeared. In the wage gap model, the wage distribution is still monocentric
but with less inequality than before. There is a significant increase in the nominal wages of
the peripheral regions, and reduced nominal wages in the central regions. Changes in
welfare are similar but more modest.
If we reverse the sequence in both models, moving from “with” to “without” in the
diagrams, it is evident that, a reduction in non-spatial trade costs will create more regional
inequality. In the HME model, liberalization will also promote a movement from a
“monocentric” pattern of agglomeration to the duocentric or bipolar pattern that obtains in the
HME model without non-spatial trade costs.15
Now turn to the reduction of spatial trade costs: We start from the situation described
by the “with” curve in Diagrams 5 and 6, and reduce the spatial trade costs only.16 Diagrams
7 and 8 show the outcome, for the HME and the wage gap models respectively:
15 Observe that we still have no country borders, so we only have regions but no countries. In the simulations to
be undertaken, we also let regions form countries, and in that context the impact of spatial liberalization may be
modified.
16 We reduce the scaling parameter for spatial trade costs from 1/6 to 0.05.
23. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
22
Diagram 7: Spatial trade liberalisation in the
HME model. Production levels.
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1 2 3 4 5 6 7
Regions
Number of firms
High
Low
Diagram 8: Spatial trade liberalisation in the
wage gap model: Nominal wage levels
1.015
1.01
1.005
1
0.995
0.99
0.985
0.98
0.975
0.97
0.965
1 2 3 4 5 6 7
Regions
Nominal wage
High
Low
Contrary to the case with non-spatial liberalization where the outcome was similar, the
impact of liberalization in the two models is now diametrically opposite: In the HME model,
spatial trade liberalization leads to a stronger core-periphery pattern, while in the wage gap
model the opposite is the case. Spatial liberalization weakens the centrifugal force of the
model; peripheries can now be served from the central areas and there is no wage
adjustment stopping the relocation of production toward the centre. But in the wage gap
model, spatial trade liberalization is to the advantage of the peripheral regions. Later, we
shall see that this also applies in the simulations with our stylized European map.
These results show that the modeling approach may be crucial for some of the
results in spatial models. In our simulations, we should therefore be aware about the
sensitivity of results to the modeling assumptions, and in particular the model choice. In
general, we consider the results from the wage gap model as more intuitive since the model
is technically more well-behaved, and is does not have the counterintuitive properties related
to the impact of trade liberalization. Nevertheless, we cannot exclude the possibility that
“duocentric” outcomes and the net export effects of the HME model, with stronger relocation
effects, are empirically relevant. We shall therefore carry out simulations also with the HME
model, and check whether results differ between the two modeling approaches.
In the simulations, we use different levels of trade costs in order to check the
sensitivity of results with respect to the levels of trade costs. There is generally no “U-shape”
in our model so that agglomeration is stronger at intermediate levels of trade costs; it is
nevertheless possible that integration effects depend on the level of trade costs. A reason for
this is that trade liberalization is generally not neutral with respect to the ratio between spatial
and non-spatial trade costs. An illustration is the following: Assume that trade costs to a
neighbour region a are ta1=1+0.2+0.2=1.4; where the two terms equal to 0.2 represent
spatial and non-spatial trade costs, respectively. To a region b twice as far away, we assume
that trade costs are tb1=1+0.4+0.2=1.6, since distance costs are doubled. Now cut both types
24. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
of trade costs by half, so that new trade costs are ta2=1.2 and tb2=1.3. We see that
ta1/tb1<ta2/tb2. A proportional reduction in all trade costs thus tends to make spatial trade costs
relatively less important, and this might affect the model outcome.
In Table B1, Appendix B, we show the parameter values used in the various
simulations. We call these “High”, “Main” and “Low” and we will generally report only results
from the “Main” alternative with an intermediate level of trade costs. Table B2 shows the
average level of trade costs for trade between regions in different countries in one of the
scenarios (the WEST scenario). We see that the average level of trade cost is around 25%
in the “Low” scenario, around 50% in the “Main scenario” and around 200% in the “High”
scenario. In spite of the suggestion by Anderson and van Wijnkoop (2003) that total trade
costs broadly defined, including distribution costs, could be as high as 170%, we consider
the level in our “High” scenario as somewhat exaggerated. However, that is the level
required if all regions are to have positive production in all scenarios in the HME model. We
include this in order to be able to run simulations with the HME model in parallel to the wage
gap model. We wish to include HME simulations in order to check whether the regional
patterns of sector agglomeration effects are similar to outcome in the wage gap model.
In the analysis, our main concern is about changes from one scenario to another.
Hence we are interested in e.g. how the change from WEST to WIDER affects income and
welfare. The main purpose is not to explain the current income distribution in Europe, but to
examine how this is affected by changes in market access. Hence we do not try to calibrate
the model to some actual distribution, but choose a configuration of parameter values that
appears plausible and technically feasible, and then examine changes from there. Using the
wage gap model, we obtain an income distribution similar to diagram 4, with modestly higher
wages and welfare in the central regions of the rectangular grid. Diagram 9 shows welfare
levels in the “base case” before any regional blocs are formed, with intermediate level of
trade costs.
23
25. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
We observe a core-periphery pattern with lower welfare particularly in regions far to
the west and east. Observe also the high welfare level in E1, due to the market access
advantage of larger country size. Given that this situation without integration might represent
the post-war situation in the 1940s and 1950s, it is evident that there was communism in the
Soviet Union. In the model used here, results are driven by market forces and it is therefore
inadequate to explain welfare changes during the Soviet period. For the Soviet/ COMECON
period, the results may therefore be of limited relevance. For Western Europe (the four
countries W1-W4), however, the pattern with peripheries in the west and higher incomes in
W3+W4 is quite plausible in the light of empirical research (see e.g. Combes and Overman
2004 or Dall’erba 2005), although the true European map is certainly richer than ours.
From this starting point, we examine how regional distribution is affected in the 10
scenarios. In tables B3-B5 in Appendix B, we show correlation coefficients between results
using different levels of trade costs. We also show how results with the HME model,
available for a high level of trade costs, are correlated with the results using the wage gap
model. These tables provide another check of the robustness of results. The general
conclusions are:
- The results are robust with respect to the level of trade costs since similar results are
obtained with low, intermediate and high trade costs. In general, the absolute values of
the correlation coefficients are above 0.9 in most cases.17 For example, for the WIDER
scenario, welfare results in the wage gap model are correlated with a correlation
17 Observe that the sign depends on which variable is involved; welfare and wages are positively correlated in the
wage gap model, and the same applies to domestic sales and the price index; but these two pairs of variables are
negatively correlated.
24
26. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
coefficient between 0.94 and 0.99 (Table B3), and changes in welfare from scenario
WEST to WIDER are correlated with coefficients at 0.95-0.99 (Table B4).
- For the HME model, domestic sales (i.e. in own region) is an appropriate indicator also
for per capita welfare (see Appendix A). Hence we observe from Table B3 that welfare in
the HME model with WIDER is highly correlated with welfare in the wage gap model
(absolute value of correlation coefficient=0.97), and this also applies to the welfare
change (0.98, see Table B4).
- For production levels in the HME model, however, correlations with results from the wage
gap model are still significant but in most cases lower. For example, with high trade
costs, the number of firms under WIDER using the HME model, and the wages obtained
using the wage model, are positively correlated with a coefficient of 0.56. Hence the
spatial pattern of change is partly different in the two models.
In Table B5, we show such correlations for more scenarios and they confirm that production
or net trade effects in the HME model is often less correlated with all other results. In some
cases, results from the HME and wage gap models are even opposite. These are shown by
shaded cells in Table B5. These cases are nevertheless exceptions and in the majority of
cases, the direction of the effects is similar in the two models. Base on the comparison, we
conclude:
- The HME model and the wage gap model behave qualitatively similarly for scenarios
with European regional integration; in the sense that welfare results, and production vs.
wages, are positively correlated.
- For the SPATIAL scenario where distance-related trade costs are reduced, the two
25
models give opposite predictions, as in Diagrams 7-8.
- For EASTOPEN, the HME model suggests that unilateral liberalization gives a welfare
loss while the opposite is the case for the wage gap model. This illustrates that the wage
gap model is more “trade-friendly” than the HME model, where unilateral protectionism
may sometimes improve welfare.
Hence in some cases, the results depend on the type of model used. It is ultimately an
empirical issue what is true, although – as argued – we have more faith in the wage gap
model as an average effect across sectors for the whole economy.
This concludes our methodological examination of the model. The challenge for
numerical modeling is to show that results are not only stories with limited generality based
on some arbitrary parameter values. We believe to have shown that the results that are
presented in the following are more than this. They hold for a wide range of parameter
values, and we have illuminated some of the model mechanisms that create the results.
27. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
26
4. Model simulation results
The numerical modeling results are intended as a point of departure for empirical
examination of the issues. Therefore, a wide variety of scenarios and results are included.
We will here only briefly sum up some main results. In Appendix C, Tables C1-C18 and the
corresponding Diagrams C1-C18 we report results from scenarios 2-10. We only report
results for the wage gap model with an intermediate level of trade costs.18 For each scenario,
the tables include nominal wage levels and welfare levels, and changes in these from some
other scenario (specified in the tables, often the WEST scenario). For each table, there is a
corresponding grey-scale map graph which shows changes for each region, with some key
words in the header. We generally do not repeat much detail in the main text so the readers
are invited to use these graphs in Appendix C as an intuitive visualization of the results.
The results encompass standard results about regional integration from the new
trade theory (see e.g. Baldwin and Venables 1995 for an overview) where participating
countries gain and outsiders may sometimes lose. As shown in this literature, an
“agglomeration shadow” may fall on non-participants close to the trade bloc. In standard
HME or NEG models, this effect is driven by net export effects and so-called “production-shifting”.
In the wage gap model, there is no such production-shifting and the agglomeration
shadow takes the form of lower nominal and real wages. Another new feature in our analysis
is that positive and negative effects vary across regions inside countries.
The results clearly indicate that there is no unambiguous conclusion about how
international integration affects domestic regions. All our scenarios represent international
integration, but the impact on regions is different in each case. By the same reasoning, we
cannot expect any unambiguous conclusion about regional inequality: International
integration may lead to convergence in some cases, and divergence in others. Our analysis
has therefore provided the “non-answer” we were searching for: There is no unambiguous
rule, and searching for a universal answer is like barking under the wrong tree.
Our simulations include four regional integration scenarios; WEST, WIDER, EAST-WEST
and EAST. In all the four cases, all the participating regions unambiguously gain in
terms of welfare. Hence also in the case of widening integration from 4 to 6 and 7, the old
members improve real wages. The gains are to some extent unevenly distributed:
- In WEST, there is a larger gain for regions that are close to the centre of the WEST area,
around the point where the four countries all border to each other.
18 Results from other scenarios used in the robustness checks in Tables B3-B5 can be provided upon request.
28. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
- In WIDER, the gain is larger in the new member states. For these, the gain is larger in
the western regions, but for the old members W1-W4, the opposite is the case. Hence
EAST-WEST is better for W3 and W4 than for W1 and W2, and better for eastern regions
in these countries. EAST-WEST moves the centre of gravity in the regional integration
area to the east.
- EAST-WEST gives a strong welfare gain for the new participant (E2) and modest positive
effects for all the old participants, with a slightly better outcome for regions closer to the
new participant. According to this, present participants of European integration have no
reason to fear further enlargement.
- With Eastern integration (EAST),19 the larger country E1 generally gains less than the
other two since without integration, it already benefits from its large country advantage. In
the wage gap model, integration is better for the small countries by creating wage
convergence.
In some, but not all cases, the welfare gain from integration is accompanied by a nominal
wage increase as well. This is however not always the case, as seen in Appendix C.
In a non-spatial model of regional integration, the “agglomeration shadow” or
negative impact on outsiders apply to all countries outside. In our case, the integration
shadow is clearly visible but it is stronger in outside regions close to the trade bloc that is
formed. In the WEST scenario, the negative impact on wages as well as welfare is larger for
Central/ Eastern European regions close to the WEST bloc, and weaker for remote regions.
There is however a negative impact for all outside regions. This applies also to the impact of
WIDER and EAST-WEST on the outsiders.
The results on European regional integration show that eastward widening of the
trade bloc gradually moves the “centre of gravity” eastward, while former members also gain
from integration. Since the centre of gravity then gets closer and closer to the centre of the
rectangular grid, the benefits of integration will be strongly correlated with any measure of
“market potential”. This strengthens the case for market potential approaches in the study of
European integration (see e.g. Brülhart et al. 2004). Such a correlation between market
potential and the impact of integration is however not present in all scenarios. For the “iron
curtain” (IRON) scenario, WTO and especially SPATIAL (reduced distance costs) there may
actually be a negative correlation, at least with simple market potential measure of the types
introduced by Harris (1954):
- While the “iron curtain” is bad for welfare all over Europe, it is particularly adverse for
regions close to the curtain itself; in western regions in Central Europe, or eastern
regions in WEST.
19 Observe that Eastern integration departs from a situation with WEST, so it is not the only trade bloc, like in the
other three cases of regional integration.
27
29. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
- The WTO scenario is especially positive for countries and regions that do not participate
in regional trade blocs. When “multilateral trade liberalization” (WTO) is undertaken in the
presence of WEST, it is particularly positive for regions outside but close to WEST. But
also members of the regional bloc gain from such liberalization. WTO liberalization
erodes the European trade preferences and thereby dampens trade policy discrimination.
- Reductions in spatial trade costs have a powerful equalising effect by being more
positive for peripheral regions along the border of the rectangular space, in particular the
regions far to the west and to the east. Observe that in this case the HME model and the
wage gap model gives different predictions, and our simulation results are along the lines
with the pattern shown in Diagram 8.
Hence the spatial impact of different types of integration varies, and some trade reforms will
lead to more income growth in regions with a lower market potential in the sense of Harris
(1954).
Finally, observe that if capital cities are “hubs” so that business has to take place via
the capital (scenario CAPITAL), it strongly boosts the real wage level in capital regions.20 In
our Russia-like country E1, the hub effect is particularly severe for regions to the far east.
For these regions, even some of their trade with neighbour regions has to pass through the
capital, and this creates a sharp increase in trade costs. The hub effect is also more severe
and negative for some regions in north-west E2 and north-west Eurasian E3: These regions
can no longer exploit their geographical proximity to Europe but have to ship some of their
goods indirectly via capitals. On the other hand, north-west E3 and south-east E3 are in fact
relatively better off since the hub effect implies a rebalancing of regions within the two
countries, by eliminating some of the geographical relative disadvantages. Hub-and-spoke
effect inside countries tend to eliminate the east-west and north-south differences in the
impact of various policies, since all peripheries in the country become peripheral, wherever
they are located. If the distance to the capital is larger, as for eastern E3 in our map, the
impact is worse.
Central European countries C1-C2 are strongly affected in a number of different
scenarios, be it as part of a European integration scheme, or being in the shadow outside
trade blocs to the west or to the east, or benefiting from “preference erosion” due to WTO
liberalization, or being trapped closed to the iron curtain. Hence not only armies have rolled
over Central Europe; our results suggest that the forces of economic geography are also
strong compared to the more “quiet corners” to the west and to the east.
20 In Tables C17-18, we show the case when this capital hub effect occurs in a setting departing from the WEST
scenario. We have also tried with other scenarios, and the impact is similar so we only report this case. The
presence of hub effects may modify the analysis of changes between different scenarios, but we do not address
this in order to avoid too much detail.
28
30. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
29
5. Concluding remarks
The main purpose of this paper has been to provide an extended theoretical
underpinning for the empirical study of European integration and regional income gaps in
Europe. Carrying out such empirical work is an extensive task that has been left for future
research. The model simulations show a number of different scenarios and a task for
empirical analysis is to determine the relevance of each scenario. During the last decades,
different trade reforms have occurred simultaneously (e.g. EU integration, East-West trade
agreements, WTO or GATT liberalization, dissolution of the Soviet Union, fall of the iron
curtain etc.). In the context of Central and Eastern Europe, a challenge is the phenomenon
of “transition” which may imply that there is an extended period of institutional change from
the former planning system to the market economy. Although the most dramatic change
probably had occurred by the mid-1990s, some effects of this change may be long-lasting
and possibly overshadow other events.
Our analysis captures some mechanisms but certainly not all, and the development
of European regions is certainly affected by other aspects that are not addressed by the
model. Input-output effects constitute a core feature in regional CGE (computable general
equilibrium) models that have been constructed for some European countries (see e.g.
Bröcker and Schneider 2002).21 While our model has nine countries, it leaves out the rest of
the world and this is surely a shortcoming. For example, the industrial change of Germany is
surely affected by competition from Asia, which is left out in our framework. Hence the
results should be interpreted with these reservations in mind.
In spite of these limitations, the results provide a rich set of hypotheses about the
spatial and regional impact of integration in Europe, which will hopefully be of use in further
research in the field. The scenarios shed light on different policy events and give predictions
about nominal as well as real income changes and their spatial variation. In Melchior (2008b)
we use the results derived here as a platform for empirical analysis of European regions
during 1995-2005.
21 With more factors of production, new effects may arise; for example, in Haaparanta (1998) trade-induced factor
market competition can drive up factor prices and even cause a welfare loss in some cases.
31. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
References
Alonso-Villar, O., 2005, The effects of transport costs within the new economic geography,
Universidade de Vigo, Departamento de Economia Aplicada, Documento de Traballo
0502.
Anderson, J.E. and E. van Wincoop, 2004, Trade costs, Journal of Economic Literature XLII
30
(September): 691-751.
Aroca, P., M. Bosch and W.F. Maloney, 2005, Spatial Dimensions of Trade Liberalisation
and Economic Convergence: Mexico 1985-2002, The World Bank Economic Review
19(3): 345-78.
Baldwin, R.E. and A.J. Venables, 1995, Regional economic integration, Chapter 31, pp.
1597-1644 in G.M. Grossman and K. Rogoff (eds.), Handbook of International
Economics, Volume 3, Amsterdam: North-Holland.
Behrens, C, 2003, International trade and internal geography revisited, Université de
Bourgogne, LATEC/LEG working Paper 2003-9.
Behrens, K., A.R. Lamorgese, G.I.P. Ottaviano and T. Tabuchi, 2007, Changes in transport
and non-transport costs: Local vs. global impacts in a spatial network, Banca d’Italia,
Temi di discussione del Servizio Studi, No. 628.
Behrens, K., A.R. Lamorgese, G.I.P. Ottaviano and T. Tabuchi, 2005, Testing the home
market effect in a multi-country world: a theory-based approach, Banca d’Italia, Temi di
discussione del Servizio Studi, No. 561.
Behrens; K., C. Gaigné; G.I.P. Ottaviano and J.-F. Thisse, 2006, Is remoteness a locational
diasadvantage? Journal of Economic Geography 6(3): 347-68.
Beine, M. and S. Coulombe, 2007, Economic integration and the diversification of regional
exports: evidence from the Canadian–U.S. Free Trade Agreement, Journal of Economic
Geography 7(1):93-111.
Brülhart, M., M. Crozet and P. Koenig, 2004, Enlargement and the EU Periphery: The Impact
of Changing Market Potential, The World Economy 27(6): 853-75.
Brülhart, M. and P. Koenig, 2006, New economic geography meets Comecon: Regional
wages and industry location in central Europe, Economics of Transition 14(2): 245-267.
Bröcker, J. and M. Schneider, 2002, How does development in Eastern Europe affect
Austria’s regions? A multiregional general equilibrium framework, Journal of Regional
Science 42(2):257-285.
32. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
Combes, P.-P. and H.G. Overman, 2004, The Spatial Distribution of Economic Activities in
the European Union, Chapter 64, pp. 2845-2909 in J. Vernon Henderson and J-F. Thisse
(eds.), Handbook of Regional and Urban Economics, Volume 4, Cities and Geography,
Amsterdam: Elsevier.
Crespo, N. and M.P. Fontoura, 2006, Regional Integration and Internal Economic Geography
– an Empirical Evaluation with Portuguese Data,Technical University of Lisboa, ISEG,
Working Paper No. 2006/25.
Crespo, N. and M.P. Fontoura, 2007, Integration of CEECs into EU Market: Structural
31
Change and Convergence, Journal of Common Market Studies 45(3): 611-632.
Crozet, M. and P.K. Soubeyran, 2004, EU enlargement and the internal geography of
countries, Journal of Comparative Economics 32: 265-279.
Davis, D.R., 1998, The home Market, Trade, and Industrial Structure, American Economic
Review 88(5): 1264-76.
Dall’erba, S., 2005, Distribution of regional income and regional funds in Europe 1989-1999:
An exploratory spatial data analysis, The Annals of Regional Science 39: 121-148.
Dodini, M. and M. Fantini, 2006, The EU Neighbourhood Policy: Implications for Economic
Growth and Stability, Journal of Common Market Studies 44(3): 507-32.
Ederveen, S., H.L.F. de Groot and R. Nahuis, 2006, Fertile Soil for Structural Funds? A
Panel Data Analysis of the Conditional Effectiveness of European Cohesion Policy,
Kyklos 59(1): 17-42.
Egger, P., P. Huber and M. Pfaffermayr, 2005, A note on export openness and regional wage
disparity in Central and Eastern Europe, The Annals of Regional Science 39: 63-71.
Fujita, M. and T. Mori, 2005, Frontiers of the New Economic Geography, Papers in Regional
Science 84(3): 377-405.
Fujita, M., P. Krugman and A.J. Venables, 1999, The Spatial Economy. Cities, Regions, and
International Trade, MIT Press.
Hanson, G.H., 2003, What has happened to wages in Mexico since NAFTA? Implications for
hemispheric free trade. NBER Working Paper No. 9563.
Haaparanta, P. 1999, Regional concentration, trade, and welfare, Regional Science and
Urban Economics 28: 445-463.
Harris, C.D., 1954, The market as a factor in the localization of industry in the United States,
Annals of the Association of American Geographers 44(4): 315-48.
33. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
Head, K. and T. Mayer, 2004, The Empirics of Agglomeration and Trade, Chapter 59, pp.
2609-2669 in J. Vernon Henderson and J-F. Thisse (eds.), Handbook of Regional and
Urban Economics, Volume 4, Cities and Geography, Amsterdam: Elsevier.
Helpman, E. and P. Krugman , 1985, Market Structure and Foreign Trade. Increasing
Returns, Imperfect Competition, and the International Economy. Cambridge MA/ London:
MIT Press.
Kanbur, R. and A.J. Venables, 2007, Spatial Disparities and Economic Development, pp.
204-215, Chapter 9 in Held, D. and A. Kaya (eds.), Global Inequality, London: Polity
Press.
Krugman, P., 1980, Scale Economies, Product Differentiation, and the Pattern of Trade,
32
American Economic Review 70: 950-959.
Krugman, P. and A.J. Venables, 1995, Globalisation and the inequality of nations, The
Quarterly Journal of Economics CX(4): 857-880.
Krugman, P. and R. Livas Elizondo, 1996, Trade Policy and the Third World Metropolis,
Journal of Development Economics 49: 137-150.
Krugman, P., 1991, Increasing returns and economic geography, Journal of Political
Economy 99: 483-499.
Landesmann, M. and R. Römisch, 2006, Economic Growth, Regional Disparities and
Employment in the EU-27, Vienna: WIIW Research Report 333.
Markusen, J. and A.J. Venables, 1998, Multinational Firms and the New Trade Theory,
Journal of International Economics 46: 183-203.
Melchior, A., 1997, On the Economics of Market Access and International Economic
Integration, University of Oslo/ Department for Economics: Dissertations in Economics
No. 36-1997.
Melchior, A., 2000, Globalisation and industrial location: The impact of trade policy when
geography matters, Oslo: Norwegian institute of International Affairs, Working paper No.
608.
Melchior, A., 2008a, Regional Inequality and Convergence in Europe, 1995-2005, Warzaw:
CASE Network Studies and Analyses No. 374, available at www.case.com.pl.
Melchior, A., 2008b, East-West Integration and the Economic Geography of Europe, Oslo:
Norwegian Institute of International Affairs, Working Paper no. 750.
Monfort, P. and R. Nicolini, 2000, Regional Convergence and International Integration,
Journal of Urban Economics 48: 286-306.
34. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
Monfort, P. and T. Ypersele, Integration, regional agglomeration and international trade,
33
Centre for Economic Policy Research, CEPR Discussion Papers No. 3752.
Neary, P., 2001, Of Hype and Hyperbolas: Introducing the New Economic Geography,
Journal of Economic Literature XXXIX: 536-561.
Paluzie, E., 2001, Trade policy and regional inequalities, Papers in Regional Science 80: 67-
85.
Puga, D., 1999, The rise and fall of regional inequalities, European Economic Review 43(2):
303-334.
Redding, S. and D. Sturm, 2005, The costs of remoteness: Evidence from German division
and reunification, CEPR Discussion paper No. 5015, Centre for Economic Policy
Research.
Römisch, R., 2003, Regional Disparities within Accession Countries, in Tumpel-Gugerell, G.
and P. Mooslechner (eds.), Economic convergence and divergence in Europe: Growth
and regional development in an enlarged European Union, Austrian National Bank/
Edward Elgar, 183-208.
Stelder, D., 2005, Where do cities form? A geographical agglomeration model for Europe,
Journal of Regional Science 45(4): 657-679.
Venables, Anthony J. 'Geography and Specialisation: Industrial Belts on a Circular Plain.' In
Baldwin, R. E.; Cohen, D.; Sapir, A.; Venables, A. (eds.), Market Integration, Regionalism
and the Global Economy. Cambridge University Press, 1999.
World Bank, 2000, Making Transition Work for All, Washington DC: The World Bank.
35. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
34
Appendix A: The modelling framework
We present the model here in a form which encompasses both models used in the
numerical simulations; the wage gap model (which is the main approach) and the home
market effect (HME) model (which is used for comparison and as a supplement to shed light
on trade effects).
There are N regions. Each region, indexed i or j, has a single factor of production;
labour, with endowment Li
22 and wage wi. The total income of the economy is therefore
Yi=wiLi. In order to keep notation simple, we use only one set of subscripts (not for regions
and countries separately).
Following a standard Dixit-Stiglitz approach, labour can be used in the production of
individual varieties of manufactured goods under increasing returns to scale. For an
individual variety xi produced in region i, there is, measured in labour units, a fixed production
cost f, constant marginal costs c and trade costs tij for sales in market j.23 For a good
produced in region i and sold in market j, the cost in value terms is equal to wi (f+ctijxij).
Trade costs are expressed as a mark-up on marginal costs so tij≥1, e.g. a trade cost
of 10% implies tij=1.1. For the purpose of the analysis here, we also allow non-zero trade
costs in the home market, so tii may be larger than 1.24 For example, some Russian regions
are huge with low population density, and it would be implausible to assume that internal
trade costs are zero. While zero domestic trade costs are normally assumed in theoretical
applications, it is technically no problem to have non-zero trade costs. We assume that tij>tjj;
i.e. inter-regional trade may be thought to include the intra-regional cost plus some additional
inter-regional cost. This assumption is plausible but also needed for the model to be well
behaved.
We assume standard CES (constant elasticity of substitution) demand functions, so
-εPj
demand for a variety from region i in market j is equal to xij = pij
ε-1Dj where pij is the price of
a variety from region i in market j, ε is the elasticity of substitution between varieties (with the
standard assumption ε>1), Pj is the CES price index in region j, and Dj is the total value of
manufactured goods sold in market j (we revert to how this is determined). With monopolistic
competition, firms maximise profits πi=-fwi+ Σj (pij-wictij)xij, and we obtain the standard pricing
condition pij=[ε/(ε-1)] wi ctij. Furthermore, free entry and exit imply that total profits have to
22 For the purpose of empirical analysis, it may sometimes be useful to think of this as “efficiency units” rather
than population, in order to adjust for different productivities in the economy.
23 We consider it simpler in terms of notation to express trade costs as a mark-up on marginal costs rather than
the usual iceberg formulation where goods melt away in transport. The results are similar.
24 In the results presented in the text, we have assumed zero trade costs within each region. Simulations including
such trade costs, for example as a function of land area or population density, were however also tried and we
therefore express the model in a form which allows this possibility.
36. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
equal sunk costs f, and as a consequence the total value of sales for a firm in region i will be
εfwi.
Now write vij = xijpij for the value of sales of an individual firm from region i in some
market j. Dividing vij by vjj, we can express the sales vij in some market j as a function of the
home market sales vjj of firms in that market: Using the demand functions and the pricing
condition, we obtain vij = vjj * (wi/wj)1-ε (tij/tjj)1-ε. Using this, the total sales of a firm in region i, Σj
vij=εfwi, can be written as
ε]N×1 is a
35
Σj vjj (wi/wj)1-ε (tij/tjj)1-ε= εfwi
or, moving the common term wi to the right hand side,
Σj vjj wj
ε-1 (tij/tjj)1-ε= εf*wi
ε.
For the N regions, we have N equations with 2N unknowns (vii, wi). In order to express this in
matrix form, we define
⎤
⎥ ⎥ ⎥ ⎥ ⎥ ⎥ ⎥ ⎥ ⎥ ⎥
⎦
⎡
⎢ ⎢ ⎢ ⎢ ⎢ ⎢ ⎢ ⎢ ⎢ ⎢
⎛
⎛
⎣
⎞
− −
ε ε
t
1 12
... ...
t
N
NN
− −
ε ε
1 ... ...
21
t
N
... ... ... ... ...
... ... ... ... ...
⎞
⎟ ⎟⎠
⎛
⎛
⎜ ⎜⎝
⎞
⎞
⎟ ⎟⎠
⎜ ⎜⎝
⎞
⎞
⎟ ⎟⎠
⎛
⎛
⎜ ⎜⎝
⎜ ⎜⎝
⎟ ⎟⎠
⎜ ⎜⎝
⎟ ⎟⎠
⎟ ⎟⎠
⎜ ⎜⎝
=
− −
×
... ... 1
1
2
22
1
1
11
1
2
1
11
1
1
1
22
ε ε
t
t
t
t
t
t
t
t
t
T
N N
NN
N N
T expresses the relative trade costs in all markets, relative to domestic supply. Using this, the
equation system above can be written as
ε-1) N×N × [vii] N×1 = εf × [wi
(1) TN×N × Diag (wi
ε]N×1
ε-1) N×N is the diagonal matrix with wi
where Diag (wi
ε-1 as diagonal elements, [vii] N×1 is a vector
with vii (i.e. the home market sales of firms in each region) as elements, and [wi
ε as diagonal elements.
vector with wi
The sales of all firms in market j must add up to Dj; i.e.
Σi nivij=Dj. ni is the number of manufacturing firms in region i, and since there is no firm
heterogeneity, and no sunk exports costs, all firms will sell a (large or small) positive amount
in any market. Expressing all vij’s in terms of home market sales as above, we can put wi and
vii on the right hand side and obtain the system of N equations
37. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
36
1-ε) N×N × [ni] N×1
(2) TN×N’× Diag (wi
-1) N×N × Diag (wi
= Diag (vii
1-ε) N×N × [Di]N×1
Combining (1) and (2) we have 2N equations with 3N unknowns (ni, vii and wi). By adding
more structure we can reduce the number of unknowns to 2N and solve the system. The
wage gap model and the HME model represent two alternative approaches:
In the wage gap model, we assume that manufacturing is the only sector in the
economy. Then the whole income is spent on manufactured goods so we have Di=wiLi.
Given that firm size is determined (see above) and assuming full employment, the number of
manufacturing firms must be ni= wiLi/(εfwi)= Li/(εf). Thereby eliminating the unknowns ni, we
obtain a system with 2N unknowns that may be solved. Equation (2) then simplifies to:
1-ε) N×N × [Li] N×1
(2a) TN×N’× Diag (wi
-1) N×N × Diag (wi
= εf × Diag (vii
2-ε) N×N × [Li]N×1
This is however a non-linear system where no explicit analytical solution can be found.25 We
therefore use numerical simulation in order to determine the outcome. As noted, we call this
the wage gap model since differences in market access show up in different wages. For
example, large regions will, ceteris paribus, have higher wages, a shown already by
Krugman (1980).
In the numerical simulations, it requires more time and is computationally less
efficient to run the whole system with 2N equations; it is better to express [vii] N×1 as a
function of the wage and insert in (2a). We then simulate (2a) with the N wage levels as the
only unknown. Given that no explicit matrix solution is available, an approximate solution has
to be found by numerical iteration. In the simulations, we minimize the function
LHS ⎞
2
⎛
i −
⎜ ⎜⎝
⎟⎠
Σ ⎟ i
1
RHS
i
where LHS and RHS refers to the left hand side and right hand side, respectively, of each of
the 90 equations. In order to have the exact solution this sum would have to become zero but
that is generally not possible. Hence we have to decide some upper threshold for this sum of
squared deviations and find an approximation to the solution. In all then simulations
presented, the values of Fi was below one, and below 0.5 in the most important scenarios.
The accuracy depends on computer time and the number of iterations. For the scenarios
simulated here and with the ranges of parameter values used, we obtained strictly positive
25 We did actually solve it for the case with two countries and ε=2, but in the general case an explicit solution is
hard to find. Note also that in (2a) we cannot “abbreviate” the similar terms on the left and right hand sides, since
in general, for three matrices A, B and C, AC=BC does not necessarily imply that A=B.
38. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
solutions in all cases. The results were also checked, e.g. by computing trade flows and
checking adding-up properties and this indicated a high degree of accuracy.
Observe also that the nominal level of wages, prices and sales is not determined and
may be scaled up or down. We therefore have to normalise all results since the numerical
results may end up at different levels. Since productivity is unchanged throughout the
“events” we simulate, we normalise the average wage to equal one.
A second option, frequently used in the literature and referred to as the HME model,
is to add a “numeraire sector” in which labour produces a homogeneous good with constant
returns to scale. Assuming that one unit of labour produces one unit of output of the
homogeneous good and that such goods are traded at zero trade costs, wages per efficiency
unit in the regions must be equalised as long as all regions produce the homogeneous good.
Using the homogeneous good as numeraire, wages everywhere must then equal one; wi=1
for all i. The version here is a slightly modified and multilateralised version of the “home
market effect model” of Krugman (1980). We must also address how consumption is divided
between the two types of goods; using a Cobb-Douglas upper-tier function with consumption
share α for manufacturing, total demand for manufacturing becomes Dj= αLj (since total
income is now Lj). In the multilateral version, equation (1) simplifies to TN×N × [vii] N×1 = εf ×
[1]N×1 (i.e. with a unit column on the right hand side). The solution for [vii]NxN can then be
found. Equation (2) becomes
1-ε as an indicator of
37
-1) N×N × [Li]N×1
(2b) TN×N’× [ni] N×1 = α ×Diag (vii
Using the solutions for vii, we can then also solve for the number of firms, and it can be
shown that, ceteris paribus, large countries will have a higher than proportionate share of
manufacturing.
In the wage gap model, the advantage of better market access is realised in the form
of a higher nominal wage per efficiency unit, whereas in the home market effect model, the
advantage appears in the form of manufacturing agglomeration. Corresponding to these two
outcomes, the trade patterns also differ: In the wage gap model, external trade in
manufactured goods has to be balanced and all trade is intra-industry trade. In the home
market effect model, trade in manufactured goods may be unbalanced, but has to be
matched by a compensating trade imbalance for homogeneous goods.26
In the HME model, we can use the CES price index for manufactured goods as a
measure of welfare per capita. It is analytically convenient to use Ri=Pi
26 Whereas bilateral trade flows for manufactured goods are determined in this model, only the aggregate trade
balance for homogeneous goods is determined, not the bilateral flows. Hence different patterns of bilateral trade
in homogeneous goods are possible, and additional assumptions are needed to pin down the exact pattern. For
the purpose of evaluating e.g. income or welfare, this is however not a problem or shortcoming.
39. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
welfare (which can be done since it is monotonically related to Pi). We can then express the
vector [Ri]N×1 in matrix form as
38
ε 1
ε
−
1
(3b) [Ri] = [Diag(N tii 1 − )] T [ni]N N N N N 1
1 1 '
× ×
−
× × × × ⎟⎠ ⎞
⎜⎝ ⎛
−
×
ε
ε
From (2b) we can find the solution for [ni] and substitute into (3b). The components T’×(T’)-1
then cancel out and we obtain the expression
ε
⎞
1
(3c) [ R i] [Diag(tii )] [N Diag (vii )][Li]N N N N N 1
⎛
−
= × ε − − −
× × × ⎟⎠
× 1
1 1 1
−
1 × × ×
⎜⎝
ε
α
ε
Since the inverse of a diagonal matrix is a diagonal matrix with inverse diagonal elements,
we can also write
1
−
ε
⎞
(3d) [Ri][Diag()] [()][Li]N tii Diag N N vii N N N 1
⎛
−
= × − −
× × × ⎟⎠
× 1
1 1
1 × ×
⎜⎝
×
ε
ε
α
ε
We observe that for region i, welfare is positively related to home market size Li, and
inversely related to the home market sales of firms (vii) as well as domestic trade costs (tii).27
The intuition is that
- in economically large regions that have a higher share of production, consumers buy a
larger fraction of goods from domestic producers and thereby pay less trade costs (since
tij>tjj)
- domestic trade costs increase prices and reduce welfare
- if firms sell a large share of production domestically, it reflects that inter-regional trade
costs are high and that reduces welfare.
In this model, the world total number of firms is constant (=ΣiLi/(εf)) so there is no welfare
effect of changes in the number of varieties.
In the wage gap model, welfare depends on nominal wages as well as the price level.
Welfare can then be measured directly by the CES quantity aggregator or utility function
Xi=[Σi xi
1-ε]1/(1-ε). Since total consumption equals total income; i.e. for region i we have
XiPi=wiLi, we simply obtain that per capita welfare is equal to
(4)
w
i
P
X
L
i
i =
i
27 In most simulation results presented in the paper, we assume that Li=1 for all regions and that there are no
domestic trade costs, tii=1. In that case, we can directly use vii as an index of welfare.
40. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
Using numerical solutions for wi, we can derive Pi and use this expression to evaluate
welfare.
The wage gap model can actually be solved analytically in the case of two regions,
symmetrical trade costs t12=t21=t and ε=2. Using the notation L=L1/L2, z=1- ε and x=(w2/w1)2,
the system has three roots of which two are complex. The third root, which is used for some
numerical illustrations in the text, is equal to
39
(5) ( )
3
1
2
a
( )
( b + a +
b
)
3 2
1
3
1
3 2
3
1
2 3 2
z 2
z
x t L t
2
4
3 2
3 4
2
3
L
L b a b
L
×
+
+ +
−
+
=
where
a = 6L2 t z −L4 t2z −4L2 t3z −t4z
and
b = 27L4 +2t3z (2L2+t z )3 −9L2 t2z (2L2+t z )(2+ L2t z )
In some special cases, the square root term in (5) can become negative so that the root of x
becomes complex. In the text, we use this equation to simulate how the model behaves for
different parameter values (Diagram 2).
41. CASE Network Studies & Analyses No. 378 - European Integration and Domestic Regions:…
40
Table B1: Parameter values in model simulations
(common values in all simulations, and specific changes in each
scenario)
Elasticity of substitution
5 in all simulations except
for Diagram 2 in text,
where ε=2 since the
solution (5) from Appendix
A is used..
Level of trade costs
High
Inter-mediate/
main
Low
Abbreviated name High Main Low
Scaling of distance (equal to maximum
of spatial trade cost) 2.5 0.5 0.25
Other regions intra-nationally
0.5 0.1 0.05
Trade costs
that are
independent
of distance To/from countries
In regional trade blocs 0.75 0.2 0.1
outside trade bloc 1.0 0.3 0.15
Specific adjustments in each scenario:
SPATIAL: Distance scaling changed to 2 0.25
WTO: Barriers to/from countries outside
trade bloc reduced to 0.9 0.25
EASTOPEN: E2’s trade costs increased
to 1.5 0.5
IRON: Non-spatial barriers between
WEST and the rest changed to 10 10
Not
calcu-lated
Regional integration scenarios (WEST-WIDER and EAST-WEST):
The level of trade costs applying to trade blocs applied to the relevant
members in each case.
CAPITAL: A separate matrix of trade costs was calculated where all
trade with and inside the three countries to the east (E1, E2 and E3)
had to pass through the capitals. The designated capitals were regions
(5,11), (2,11) and (2,14). Distances were recalculated. Trade costs were
then calculated using the average between this and the ordinary
distance matrix, with equal weights.