Integration, Regional Specialization and Growth Differentials in EU Acceding Countries
economic integration leads to convergence of income per capita and growth rates among
the participating countries and regions. More recent models from the endogenous
growth theory and new economic geography, based on imperfect competition and
increasing returns to scale, argue that the reduction of trade barriers could foster
divergence forces and predict that increasing disparities within and across countries
might be the likely outcome of integration. However, the exact outcome of increased
openness on growth and disparities depends on the degree of integration, and the extent
of technology spillovers.
The traditional trade models explain trade patterns and specialization through
differences in relative production costs termed ‘comparative advantages’ resulting from
differences in productivity (technology) (Ricardo (1817)) or endowments (Heckscher
(1919); Ohlin (1933)) between countries and regions. Free trade is predicted to increase
the efficiency of resources allocation, competition, and thus result in higher growth and
income per capita. While these models are comparative - static and thus they do not say
anything about the contribution of integration to a higher long-run growth rate, they
predict that factor prices will be equalized and income per capita will converge in the
long term.
Growth models in the neo-classical framework pioneered by the seminal paper
of Solow (1956) focus on capital accumulation as the driving force for growth and
predict convergence of income per capita across countries and regions in the long run.
This prediction is derived from two basic assumptions: a) diminishing returns to capital
and b) free availability of technological progress to all economies. The first assumption
implies that poor economies will have higher returns to capital and will therefore
accumulate capital and grow faster than the rich economies generating thus convergence
of income per capita across countries and/or regions. Economic integration, in particular
the free movement of capital, can reinforce this convergence process because the capital
is likely to flow in from richer areas (European Commission (2001b)). The second
assumption implies that technology can improve and diffuse at no cost in the integrated
area and thus contribute to a process of convergence.
The neo-classical growth models have come increasingly at pain to explain the
reality in particular, the fact that rich countries have grown richer and poor countries
have grown but have not caught up with the rich countries. The assumption of
diminishing returns to capital implies that, for a given level of technology, there is a
limit beyond which accumulation of capital per worker is no longer profitable. Thus,