Speed of Convergence and Relocation - New EU Member Countries Catching up with the Old

Kari E.O.Alho, Ville Kaitila and Mika Widgrén
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Kari E.O.Alho: ETLA (the Research Institute of the Finnish Economy) and the University of Helsinki

No 34, Economics Working Papers from European Network of Economic Policy Research Institutes

Abstract: Economic convergence of the EU’s new member countries (NMCs) towards the incumbent EU countries (EU-15) is of paramount importance for both partners, not only in terms of real income but also in nominal terms. In this study we build a dynamic, computable general equilibrium model, starting from the Balassa-Samuelson two-sector framework, then modify and enlarge it (with, among other things, endogenous capital formation, consumption behaviour and labour mobility) to address several other issues such as uncertainty, welfare and sustainability in terms of foreign indebtedness. At the same time we make flows of foreign direct investment (FDI) endogenous in order to evaluate the impact convergence has on the EU-15 and the interaction between the two regions through FDI. We find that in a general equilibrium setting, fears of adverse effects resulting from a relocation of EU-15 manufacturing to the NMCs are not well founded.

Keywords: convergence; new member countries; EU-15 (search for similar items in EconPapers)
JEL-codes: F15 F21 F43 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2005-04
New Economics Papers: this item is included in nep-eec and nep-tra
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Citations: View citations in EconPapers (4)

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Working Paper: Speed of Convergence and Relocation: New EU Member Countries Catching up with the Old (2005)
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