policy can be related to differences in the
sectoral composition of member countries, as
sectors respond in different ways to monetary
shocks.
Regarding the long-run effects of
specialisation, the literature on (endogenous)
economic growth suggests that sectoral
composition has a major impact on productivity
growth5. On the one hand, sectors may differ
with regard to their productivity potential,
depending on fundamentals such as the scope
for technological progress or economies of
scale, but also on the regulatory framework
under which firms operate in a particular
sector6. On the other hand, structural
adjustments where resources are shifted from
low-productivity to high-productivity sectors
are in themselves a source of improved long-
term growth.
Sectoral specialisation may also affect short-
run macroeconomic dynamics. Sectors may
follow different patterns over the aggregate
business cycle depending on their position in
the value-added chain and their integration in
world markets. Moreover, distinct product and
production characteristics of sectors - such as
the longevity of their products, the importance
of inventories and the capital intensity - may
trigger different reactions of sectors to similar
shocks. Overall, this not only means that
economies are exposed to different kinds of
exogenous shocks but also that the way in
which they respond to similar shocks differs.
This is directly related to the relative magnitude
and amplitude of the business cycles of Member
States and to the synchronisation of business
cycles across EU countries.
The aim of this section is to review some of the
existing literature related to these issues. The
next sub-section will look at the factors that
affect the composition of a country’s productive
structure while the last sub-section will look at
the impact of sectoral specialisation on business
cycle evolutions.
1.3 ECONOMIC INTEGRATION AND SECTORAL
SPECIALISATION
The process of EU integration may have
constituted an important driver of sectoral trade
and production specialisation of EU countries.
However, the impact of economic integration
and in particular trade integration on sectoral
specialisation is thought to be ambiguous, and
several channels through which product and
factor market integration affect sectoral
specialisation can be distinguished (see
Chart 1).
Classical trade theory suggests that economic
integration and the elimination of obstacles to
trade lead to greater divergence in the
productive structures of countries and to an
increase in inter-industry trade. Each country
becomes specialised in producing those goods it
has a comparative advantage in or a relatively
lower opportunity cost in producing.
Introducing imperfect competition on product
markets, the new trade theory by contrast
suggests that economic integration leads to less
inter-industry specialisation and a convergence
of productive structures between countries. A
more open access to markets allows for the
exploitation of economies of scale and leads
monopolistically competitive firms to specialise
in producing different varieties of similar
products resulting in an increase in intra-
industry trade, which in turn is likely to reduce
cross-country sectoral specialisation.
5 For instance, in a two-sector endogenous growth model, the
growth rate depends on the size of the innovative sector, see R.
E. Lucas Jr (1998), “On the mechanisms of economic
development”, Journal of Monetary Economics, no 2, pp 3-42,
and P. Aghion and P. Howitt, (1992), “A model of growth through
creative destruction”, Econometrica, no 60/2, pp. 323-351.
6 For a recent study that has looked - among other things - at the
impact of sectoral regulations on sectoral innovation intensity as
an important determinant of productivity, see A. Bassanini and E.
Ernst (2002), ”Labour market institutions, product market
regulation, and innovation: Cross-country evidence”, OECD
Economics Department Working Paper, no 316.
ECB
Occasional Paper No. 19
July 2004