Growth Effects of Economic Integration: Evidence from the EU Member States

Harald Badinger
University of Economics and Business Administration, Vienna Abstract: After compiling an index of economic integration that accounts for global (GATT) as well as regional (European) integration of the EU member states we test for permanent and temporary growth effects in a growth accounting framework, using a panel of fteen EU member states over the period 19502000. While the hypothesis of permanent growth effects is rejected, the resultsthough not completely robust to controlling for time-specic effectssuggest sizeable level effects: GDP per capita of the EU would be approximately one-fth lower today if no integration had taken place since 1950. JEL no. C33, F15, F43, O52 Keywords: Economic growth; economic integration; European Union; panel data

1 Introduction The second half of the twentieth century was characterized by unprecedented progress in both global and regional economic integration. The development of the European Unions (EU) external and internal economic relationships mirrors these two overlapping processes. Global economic integration, here mainly considered as trade liberalization in the framework of the General Agreement on Tariffs and Trade (GATT), led to a reduction in the EUs (formerly the European Communitys (EC)) harmonized external tariff from some 17 per cent in 1968 down to 3.6 per cent in 2000. Within the same time, the EC expanded from six members originally to 15 members. These member states not only completely liberalized their intra-trade relations, but also established a Single Market, introduced a single currency, installed common institutions (European Council, European Commission, European Court of Justice) with considerable supranational competencies and adopted common or co-ordinated policies in several important areas
Remark: I wish to thank Fritz Breuss for a number of helpful comments on an earlier draft. This paper has also beneted much from the comments of an anonymous referee. Please address correspondence to Harald Badinger, Europainstitut, Wirtschaftsuniversitt Wien, Althanstrae 39-45/2/3, A-1090 Wien; e-mail: harald.badinger@wu-wien.ac.at 2005 Kiel Institute for World Economics

DOI: 10.1007/s10290-005-0015-y

Badinger: Growth Effects of Economic Integration

51

(such as monetary policy, external trade, agriculture, competition, energy etc.) A question of great interest not only from an academic point of view but also from an economic policy and public perspective relates to the consequences of this process for economic growth and thus human welfare. From a theoretical point of view, both negative and positive effects of integration are conceivable: Countries that are integrated into the world economy interact with one another in several dimensions. They trade goods on world product markets, borrow and lend on world capital markets, and exchange information through market and nonmarket channels. Many of these global interactions generate forces that accelerate growth in every country. But several suggest reasons why international integration might impede growth (Grossman and Helpman 1997: 336). Moreover, economic theory is still split on whether the integration-induced effects on the growth rate are only temporary (neoclassical growth theory, endogenous growth theory without scale effects) or permanent (endogenous growth theory with scale effects). Thus, more empirical work on this issue seems warranted, given its obvious policy relevance. Being the most far-reaching integration project in history, the EU offers an example par excellence to test different hypotheses concerning the effects of economic integration on growth. Surprisingly, however, and in contrast to the large literature on trade, openness and growth (see Lewer and Van den Berg (2003) for a recent survey), there are only few studies on this issue and with conicting results. Landau (1995) nds no effect of EC membership on growth at all. In contrast, the results of Henrekson et al. (1997) point to a permanent effect on the growth rate, ranging from 0.6 to 1.3 per cent per annum. More recently, the hypothesis of permanent effects on the growth rate has been rejected again by Vanhoudt (1999). Obviously, a proper measurement of economic integration is a prerequisite for the estimation of its effects; the variables used in previous studies on the effects of European integration (such as dummies for membership in the EC and/or EFTA, length of membership, trade shares or market expansion as a result of the EC enlargements) may only be poorly correlated with the actual liberalization process, which may in part explain the conicting results. In this paper we compile a new measure of the EU-15s economic integration, which captures both GATT liberalization and European integration. It considers all the relevant steps of European integration (EC, EFTA, trade agreements between EC and EFTA in the 1970s, Single Market, European Economic Area) and accounts for their continuous implementation. Using

52

Review of World Economics 2005, Vol. 141 (1)

this integration variable we go on to test for permanent and temporary growth effects of integration in a cross-country growth accounting framework, using a panel of the 15 EU member states over the period 19502000. While the hypothesis of permanent growth effects of economic integration is strongly rejected, we nd sizeable level effects of integration. GDP per capita of the EU-15 would be approximately one-fth lower today if no integration had taken place since 1950. The remainder of the paper is organized as follows: Section 2 discusses the theoretical background to the empirical model used in the estimations. Section 3 presents a new measure of economic integration for the EU member states. Section 4 describes the data used in the estimation of the empirical models in Section 5. Section 6 summarizes the results and concludes. 2 Theoretical Background and Empirical Model In order to provide a minimum formal framework for our discussion, we consider a simple CobbDouglas production function with constant returns to scale Y = AK L , where Y is output, A is technology, K is capital, L is labour, and and = 1 denote the respective output elasticities. Dividing by labour and taking log differences we have ln yt = ln At + ln kt , (1) where y = Y /L and k = K /L. From this common formulation it is easily recognized that integration may affect growth via one of two (supply-side) channels: technology, A, and physical capital, K . Accordingly, the literature distinguishes between technology-led and investment-led growth effects of economic integration (Baldwin and Seghezza 1996).1 2.1 Integration-Induced Technology-Led Growth The hypothesis that economic integration improves an economys overall efciency is at least as old as Adam Smiths famous dictum that the division of labour is limited by the extent of the market (Smith 1789, Book I, Chapter III). More opportunities to exploit economies of scale in an increased
1

In a more general specication the production function would also include human capital. Correspondingly, there is also a skills-led growth hypothesis. Since we obtained no signicant results for human capital we omit this variable here from the beginning to simplify the exposition.

Badinger: Growth Effects of Economic Integration

53

market are also stressed by Balassa (1961) as a propelling force of economic integration. Baldwin (1989, 1993) emphasizes the role of enhanced factor mobility, lower trade costs and more competition in promoting an economys efciency. A further rationale for the technology-led growth hypothesis is provided by Coe and Helpman (1995), who nd that a countrys total factor productivity is not only determined by its own R&D capital stock, but also by that of its trade partners. By easing technology spill-overs from abroad, integration enhances a countrys opportunities to improve its efciency by participating in other countries technological progress. Denoting the level of integration at time t with INTt , the technology-led growth hypothesis can be written in its most simple form as ln At = A0 + A1 INTt , (1a)

where A0 is an exogenous component of technological progress. Equation (1a) as it stands postulates only temporary growth, i.e. level effects of economic integration, as usually assumed in neoclassical growth theory, where the steady-state growth rate is determined only by an exogenous rate of technological progress. Alternatively, a permanent effect on the growth rate is conceivable, which can be formalized by replacing the progress in integration INTt in (1a) with its level INTt , yielding
P P ln At = A 0 + A1 INTt .

(1a )

The hypothesis of permanent growth effects of integration emerges from endogenous growth theory with scale effects. Romer (1990) is a representative model, whichmainly as a result of assuming constant returns to the stock of knowledgeimplies that larger countries grow faster. Simply speaking, in this framework integration can be viewed as an increase in the size of the economy, leading to a higher steady-state growth rate.2 Endogenous growth models with scale effects were strongly criticized in an inuential paper by Jones (1995); a number of endogenous growth models without scale effects have been developed since then (e.g. Young 1998). Predicting only level effects of integration, their conclusions with respect to the growth effects of integration can be reconciled with neoclassical growth theory. In our empirical analysis, both competing hypotheses represented by (1a) and (1a) will be considered.
2

A formal treatment in a two-country version of the Romer (1990) model is given by Rivera-Batiz and Romer (1991).

54

Review of World Economics 2005, Vol. 141 (1)

2.2 Integration-Induced Investment-Led Growth In the light of the empirical evidence, some authors regard a two-chain link between trade and growth through investment as more relevant than trade-induced efciency increases (Levine and Renelt 1992). Some intuitive reasoning on this investment-led growth hypothesis can already be found in Balassa (1961), who stresses the role of integration in creating a more favourable environment for entrepreneurial activities, reducing the risk premium for investments (less uncertainty), and lowering the cost of capital as a result of more efcient nancial markets. Again, in the neoclassical framework the postulated effects on the growth rate are only temporary. In its simplest form, the investment-led growth hypothesis can be written as ln kt = k0 + k1 INTt . (1b)

The corresponding hypothesis of permanent investment-led growth effects is provided by the class of AK models, a branch of endogenous growth theory with a constant-returns-to-capital production function Y = AK .3 However, AK models have been criticized for their knife-edge character and empirically by Jones (1995: 509), who concludes that the AK models do not provide a good description of the driving forces behind growth in developed countries. Once more, the existing evidence suggests that the investment-led growth effects of integration, if any, are only level effects, but the hypothesis of permanent effects can again be easily tested by replacing INT with INT in (1b). 2.3 Overall Growth Effect of Economic Integration With a view to the empirical analysis one could debate the need to divide growth between the accumulation of inputs and improvements in technology. For some questions of interest, this division is unnecessary, and should probably be avoided. ... if the focus is a policy variable like ination or thebudget positionor, as in our case, economic integrationit will often be preferable to omit factor accumulation altogether and concentrate on the overall growth effect of policy measures (Temple 1999: 150). This overall
3 Ignoring depreciation, an investment ratio of s implies that the capital stock and output grow at a rate of sA. If one is willing to assume that integration causes a permanent shift in the investment ratio s or the technology parameter A, a higher steady-state rate of capital accumulation and output growth would be the effect.

Badinger: Growth Effects of Economic Integration

55

growth effect of integration is obtained by substituting (1a) and (1b) into (1), yielding ln yt = 0 + 1 INTt , (2)

where 0 = A0 + k0 , and 1 = A1 + k1 . The hypothesis of permanent growth effects can be tested using
P P + 1 INTt . ln yt = 0

(3)

In our empirical analysis we will depart from these models without factor accumulation. Additionally, we will test (1a) and (1b) directly, as well as a quasi-reduced form of (1) and (1b) in order to assess the relative importance of the technology and the investment channel. Since we are not concerned with the issue of convergence here, we regard this cross-country growth accounting approach, which was (re-)introduced by Benhabib and Spiegel (1994) as an alternative to the convergence specication with the initial level of income, as the more appropriate specication for our question of interest.

3 On the Measurement of Economic Integration Obviously, a proper measurement of economic integration is a prerequisite for estimating its effects. Nevertheless, the choice of proper integration variables has hardly attracted attention in the literature. Ben-David (2001), in a response to Slaughter (2001) who questions the convergence-stimulating role of trade obtained by Ben-David (1993) shows that a failure to distinguish formal from actual periods of liberalization may lead to potentially misleading results. This criticism applies equally to previous studies on the growth effects of European integration which use crude integration variables as zero-one dummies for membership in EC/EFTA, length of memberships in the EC/EFTA (Landau 1995; Henrekson et al. 1997) or market expansion due to the EC enlargements in terms of relative increases in the ECs population or GDP (Vanhoudt 1999). Obviously, such simple measures can hardly capture the EU-15s complex process of post-war economic integration, which is summarized in Table 1. First, integration is a continuous process, not characterized by discrete jumps as reected in zero-one dummies. The customs union, for example, was implemented over a time period of 10 years (19571968); similarly, DK, IE and the UK were given a transition

56

Review of World Economics 2005, Vol. 141 (1)

Table 1: Major Steps of EU Member States Post-War Economic Integration

European integration 1944: Benelux Customs Union (BE, LU, NL) a) elimination of tariffs between BE, LU, NL, b) harmonization of external tariff (1950: 9%), (assumed) implementation: 19451950. 1958: EC-6 (BE, DE, IT, NL, LU, FR): Customs Union a) elimination of intra-EC-6 tariffs, b) harmonization of external tariff (1968: 16.8%), implementation: 19581968. 1960: EFTA-7 (AT, CH, DK, NO, PT, SE, UK) elimination of intra-EFTA-7 tariffs, (1961: free trade agreement FI-EFTA), implementation: 19601967. 1973: First EC enlargement (DK, IE, UK) EC-9 a) elimination of tariffs between DK, IE, UK and EC-6, b) harmonization of external tariff, implementation: 19731978. 1973: Free trade agreements between EFTA-6 and EC-9 elimination of tariffs between EFTA-6 members (AT, CH, IS, NO, PT, SE) + FI and EC-9, implementation: 19731978. 1981: Second EC enlargement (GR) EC-10 a) harmonization of external tarif, b) elimination of tariffs between GR and EC-9, implementation: 1981 1985. 1986: Third EC enlargement (ES, PT) EC-12 a) harmonization of external tarif, b) elimination of tariffs between ES and EC-10, implementation: 1986 1995. 1993: Single market (EU-12) 4 freedoms + anking measures (common policies), instantaneous implementation assumed. 1994: European Economic Area (EEA) partial implementation of four freedoms between EU-12 and EFTA-7 except CH (AT, FI, IS, LI, NO, SE), instantaneous implementation assumed. 1995: Fourth EC enlargement (AT, FI, SE) EU-15 a) harmonization of external tariff, b) participation in Common Market, instantaneous implementation assumed. Note: Country index: Austria (AT), Belgium (BE), Denmark (DK), (West)-Germany (DE), Finland (FI), France (FR), Greece (GR), Ireland (IE), Italy (IT), Netherlands (NL), Portugal (PT), Spain (ES), Sweden (SE), United Kingdom (UK), Luxembourg (LU). Monetary integration (1978: EMS, 1999: EMU) is not considered here. Data on tariff levels, size and timing of tariff reductions and tariff harmonization taken from Breuss (1983), El-Agraa (2001), and WTO (1995). a indicates missing values that were completed according to the relative position of a country at a later point of time for which data were available. 19861993: Uruguay-Round average (relative) tariff reductions: 40%, assumed implementation: 19941999. GATT liberalization

1950: Individual external tariffs (%) AT (20), BE (9), DE (16), DK (5), ESa (24), FI (13.5), FR (19), GRa (24), IEa (17), IT (24), NL (9), PTa (24), SE (6), UK (17).

19641967: Kennedy-Round average (relative) tariff reductions: 47%, assumed implementation: 19681972.

19731979: Tokyo-Round average (relative) tariff reductions: 30%, assumed implementation: 19801985.

Badinger: Growth Effects of Economic Integration

57

period of ve years to implement the customs union after their accession to the EC in 1973. Second, identifying the progress in the EU-15s economic integration with EC enlargements is partly misleading, in particular for the former EFTA countries (but also FI), which had already completely liberalized their trade relationships with the EC in the free-trade agreements in the 1970s, not only with their EC (EU) accession, which then only required the harmonizing of the external tariff, andsince 1993the adoption of the Single Market Programme with its four freedoms. Finally, the EU-15s economic post-war integration was not only driven by regional European integration, but also by global economic integration, viewed here as trade liberalization in the framework of the General Agreement on Tariffs and Trade (GATT) (see Table 1, right column). In this paper we propose a new measure of the EU-15s economic integration, which takes both GATT liberalization and European integration into account. It captures all the relevant steps of European integration (EC, EFTA, trade agreements between EC and EFTA, Single Market, European Economic Area (EEA)) and considers their continuous implementation. The integration index for country i is based on the following measure of protectionism PROTi,t = Ti,t + TCi,t =
J j=1

wij,t (tij,t + tcij,t ),

(4)

which is essentially a weighted sum of tariffs, tij , and trade costs, tcij , where the weights, wij , correspond to the share of country is trade with country j (imports plus exports) in the total trade of country i. If the trade regimes of the countries are symmetric, then Ti also measures (at least approximately) other countries protectionism against country i and TCi also measures the average trade costs of an enterprise of country i. At least changes in the protectionism of each country should be highly correlated if liberalization has been conducted on the principle of reciprocity. In this case the index (PROT)although rst a measure of country is protectionism against the rest of the worldcan also be interpreted as a more general measure of integration of the according country with the world economy. Let us rst consider the calculation of the weighted tariff Ti in (4). Unfortunately, there are no time series data for the tariffs of EU countries. We have, however, information on the initial tariffs in 1950 for most of the countries and the relative size and timing of the tariff reductions following the according GATT rounds (see Table 1, right column). According to the

58

Review of World Economics 2005, Vol. 141 (1)

General-Most-Favoured-Nation Treatment (Article I of GATT) this general external tariff applies (should apply) to 100 per cent of trade, unless there are special agreements of regional integration (admissible under Article XXIV of GATT). Starting from the initial level in 1950, the development of the EU-15s external tariffs was then shaped by the GATT tariff reductions (see Table 1, right column) and the requirement to adopt the ECs external tariff after joining the EC. The ECs external tariff, in turn, was harmonized by the establishment of the customs union between the original six EC members until 1968, and later on reduced after each of the GATT rounds. Figure 1 shows the corresponding development of the countries external tariffs, ending up with a harmonized external tariff for all EU member states of 3.6 per cent in 2000.
Figure 1: External Tariff af EU-15 Member States, 19502000

The process of regional European integration went beyond GATT liberalization, leading to a complete elimination of intra-EU and intra-EFTA tariffs, as well as of tariffs between EU and EFTA countries (see Table 1, left column). The calculation of the measure PROTi for the individual countries requires a careful investigation of each countrys particular integration history in order to identify when and how fast the tariffs against other EU

Badinger: Growth Effects of Economic Integration

59

countries have been eliminated. The procedure cannot be outlined for each country in detail here; the essential ingredients, however, are summarized in Table 1. In order to quantify the effect of the Single Market we use a measure of weighted trade costs, TCi . The variable tcij is not an overall measure of trade costs between country i and j, but is meant to represent only that extent of trade costs between country i and j which has been eliminated by the Single Market. Following Smith and Venables (1988), we assume that the Single Market led to a reduction in trade costs, amounting to a tariff equivalent of 2.5 per cent. In the calculation of PROTi , tcij is added to the tariff tij applicable to each trade ow, and set to zero as of 1993 for trade ows between the EU-12 countries. The European Economic Area (see Table 1), which is relevant here for the relations between AT, FI, SE and the EU-12, is assumed to have halved tc in 1994. In 1995, after the EU accession of these three countries, the remaining half of tc is assumed to have been eliminated. Of course, the choice of a 2.5 per cent tariff equivalent of the Single Market is somewhat arbitrary, but the same argument can be held against ignoring the Single Market (i.e. setting the effected reduction in trade costs to zero). In order to obtain our nal index of integration INTi,t , we scale the reductions in PROTi,t with its initial value in 1950, giving the variable INTi,t the interpretation of the percentage of the total post-war integration achieved by country i at time t : INTi,t = PROTi,1950 PROTi,t . PROTi,1950 (5)

Beside its easier interpretation, this scaling has further advantages. First, it mitigates the uncertainty with respect to the initial tariff levels in the 1950s, compared with the relatively good information on the timing and relative size of the tariff reductions. Furthermore, the construction of INTi,t as index, which can vary between zero (initial degree of integration) and one (full integration), links the variable more closely to the theoretical models by Romer (1990) or Young (1998). Of course, these advantages come at the cost of ignoring differences in the absolute progress in integration: Initially more protectionist countries had a longer way to go and maybe also more to gain. This point, however, may be addressed by testing for country-specic coefcients of INTi in our panel estimation. Figure 2 shows the development of INTi,t for the aggregate EU-15 (weighted with shares of trade in total EU trade) since 1950. The residual level of protectionism of some 13.2 (in per

60

Review of World Economics 2005, Vol. 141 (1)

Figure 2: Index of Integration for EU-15, 19502000

cent of its 1950 level) in 2000 is due to the external tariff of 3.6 per cent and the trade costs of 2.5 per cent, both applicable to extra-EU trade (see (4)). Of course, the variable INT is still far away from being a perfect measure of the EU-15s economic integration. The treatment of the Single Market is clearly not satisfactory yet. We also had to ignore the elimination of non-tariff barriers, on which no comprehensive information is available for the time horizon of our investigation. Additionally, INT is based on average tariffs for industrial goods and neglects industry-specic regimes such as the Common Agricultural Policy (which is anything other than a policy promoting free trade). Finally, the variable INT also does not capture the cohesion policy of the EU, in particular the transfers to GR, PT, ES, and IE. After all, despite the remaining caveats, the variable INT i,t should mirror the actual process of the EU-15s post-war economic integration more closely than simple dummy variables or trade shares and provide a reasonable approximation for our purposes.

4 Data Table 2 shows the variables and data used in the estimation of the empirical models derived above. We use a panel of the 15 EU member states over the period from 1950 to 2000. Since Luxembourg had to be excluded due

Badinger: Growth Effects of Economic Integration

61

Table 2: Description of the Variables Used in the Estimation

Variable ln yi,t Description Average growth rate of GDP per worker (Y /L). Y = real GDP in US $ (1990 prices, 1990 PPPs), L = employment in number of persons. Average growth rate of capital per worker (K /L). K = real capital stock in US $ (1990 prices, 1990 PPPs), calculated using a perpetual inventory method: Kt = Kt 1 (1 ) + It , with It = gross xed capital formation, = depreciation rate (assumption: 5%). Initial level: K1955 = IHP55 /(gI ,50-60 ), where IHP55 = HodrickPrescott ltered level of investment in 1955, gI ,50-60 = average growth rate p.a. of investment from 50 to 60 (de la Fuente and Domnech 2000). (Absolute) change in level of integration = (INTi,t ) (INTi,t 1 ), where INTi,t = average level of integration in period t . Various measures of human capital (mean years of schooling, attainment rates). Average growth rate of GDP deator. Units % p.a. Sources OECD: National Accounts, Economic Outlook; Maddison (1992). OECD: National Accounts.

ln ki,t

% p.a.

INTi,t

% p.a.

IMF: IFS; DoT; El-Agraa (2001); Breuss (1983); own calculations; see Section 3. Barro and Lee (2000); de la Fuente and Dom enech (2000). OECD: National Accounts; IMF: IFS; Maddison (1992). OECD: National Accounts.

ln hi,t

years % % p.a.

i,t

OPENi,t

Openness: (real) imports plus exports in per cent of GDP.

Note: i = 1, ..., 14, t = 1, ..., 10 (5-year intervals, 19502000). There are some missing observations for the period 19501960 which had to be approximated by inter/extrapolation.

to missing data, 14 countries remain. To smooth out cyclical uctuations and distortions by short-run shocks, we use overlapping, ve-year averages (t = 110: 19501955, 19551960, ..., 19952000) and calculate the average annual growth rates of our variables by running least squares of the respective log levels on a time trend. This is preferable to using log differences,

62

Review of World Economics 2005, Vol. 141 (1)

since both the initial and the level at the end of the period may be considerably off the trend path of output (Temple 1999: 119). As output measure we use real GDP data (in 1990 prices, 1990 PPPs) from the OECD rather than Penn World Tables (PWT) data; thus the calculated growth rates are equal to the real growth rates in national currencies.4 5 Estimation Results Table 3 reports the estimation results for the empirical models outlined above. To control for the substantial slowdown of growth since the early 1970s, which followed the golden age of high economic growth in Europe from 1950 to 1970 (Maddison 1995), we include a level dummy (D70-00 ), taking a value of zero for the periods 14 (19501970) and a value of 1 for the periods 510 (19702000). At the bottom of Table 3, we also report F-Tests for the null of parameter homogeneity across countries. Since the hypothesis of a common parameter is rejected for the intercept and D70-00 in de facto all models, we use a xed effects specication with variable intercept and allow the coefcient of D70-00 to vary across countries. In Table 3, however, only averages of the country-specic intercepts and coefcients of D70-00 are reported. The rst two columns show the least square dummy variable (LSDV) estimates of our empirical models (2) and (3), controlling for the slowdown of growth in the 1970s by D70-00 . The level of integration (INT), corresponding to the hypothesis of permanent growth effects, is insignicant and also shows the wrong (negative) sign (column (a)); even if we allow for heterogeneous coefcients (as might be suggested by the F-statistic, whose p-value is only slightly above the 10 per cent level), only 5 coefcients turn out signicant, 3 of which with the wrong sign. These results can be enforced by unit root tests on yearly time series of the variables, a testing strategy suggested by Jones (1995): While Augmented DickeyFuller tests indicate that ln yi,t is stationary for all countries, the
4

Nuxoll (1994) shows that growth rates calculated from data measured at international prices (like the PWT) may be systematically distorted by the so-called Gerschenkron effect. Although the PWT do not exhibit a serious bias due to the high level of aggregation, their growth rates differ from the national accounts data growth rates. Consequently, Nuxoll (1994: 1434) argues that using domestic prices to measure growth rates is more reliable, because those price characterize the trade-offs faced by the decision-making agents, and hence have a better foundation in the theory of index numbers. Probably the ideal is to use Penn World Table numbers for levels and the usual national-accounts data for growth rates.

Badinger: Growth Effects of Economic Integration

63

Table 3: Panel Estimates for EU Member States, 19502000

Dependent variable: ln yi,t (a) (b) Intercepta 4.186 3.791 1.101 2.178 D70-00 a INTi,t 0.277 (5.84) 0.059 INTi,t ( 1.43) ln ki,t ln yi,t 1 OPENi,t i,t

(c)

(d)

(e)

(f)

(g)

(h)

4.967 4.303 4.119 2.172 2.438 2.053 2.146 2.570 2.579 0.903 1.258 1.003 0.284 0.220 0.306 0.139 0.104 (4.39) (3.85) (2.09) (2.58) (2.49) 0.346 0.271 0.346 (6.88) (4.63) imposedb 0.008 ( 0.01) 0.024 ( 0.54) 0.010 ( 0.19) 2.95 2.87 1.16 1.34 1.72 1.25 1.25 1.024 0.668 0.584 1.38 1.93 0.77 1.72 1.72 1.66 1.72 0.69 0.79

F-tests for parameter homogeneity Intercept 2.07 1.98 1.18 D70-00 1.89 2.48 1.88 INTi,t 0.76 0.77 ln ki,t 1.56 INTi,t

Regression statistics SEE 1.177 1.079 1.094 0.931 0.984 R2 0.562 0.631 0.641 0.710 0.679 0.451 0.538 0.522 0.593 0.549 Adj. R2 Period 19502000 19552000 19652000 T = 110 T = 210 T = 410
, ,

1.006 1.009 0.682 0.406 0.599 0.256 19502000 T = 110

indicate signicance at the 10, 5 and 1 per cent level respectively. Note: t -values in parentheses (calculated using White heteroscedasticity-consistent standard errors). All models except (e) estimated using the LSDV approach. Model (e): rstdifferences GMM estimation of (b), using lagged differences as instruments for INTit , starting with lag two (INTi,t 2 ). GMM estimation was carried out using DPD98 by Arellano and Bond (1998). a Reported numbers are averages of country-specic coefcients. b Coefcients imposed according to the average income shares of capital (19871989) reported by Coe and Helpman (1995) (primary source: OECD, Analytical Database), AT: 0.358, BE: 0.355, DE: 0.401, DK: 0.338, ES: 0.391, FI: 0.331, FR: 0.354, GR: 0.29, IE: 0.281, IT: 0.376, NL: 0.390, PT: 0.328, SE: 0.338, UK: 0.311, EU: 0.346.

64

Review of World Economics 2005, Vol. 141 (1)

null of a unit root cannot be rejected for any of the indices INTi . Thus, there cannot be a long-run equilibrium relationship between the two variables, at least not in the linear form as postulated by (3). On the contrary, the change in the variable INT, corresponding to the hypothesis of levels effects of integration, enters signicantly at the 1 per cent level (column (b)).5 Interestingly, the restriction of a common coefcient for INTi across countries cannot be rejected; given the construction of INT as an index, whose absolute change from 1950 to 2000 varies only slightly across countries (see Section 3), the gains from integration (in per cent of their own GDP) seem to have been shared symmetrically among the EU member states. The same results are obtained in tests of parameter homogeneity between groups of large and small countries. The coefcient of INT is not only statistically but also economically signicant: as will be outlined more in detail below, the implied level effect on the EUs GDP per capita amounts to some 26 per cent. Finally, note that the numbers reported for the xed effects and D70-00 show a plausible dimension: On average, annual growth was lower by some 2 per cent in the period since 1970, a value similar to that reported by Maddison (1995: 64, 79). Of course, this result requires some sensitivity analysis. The most critical feature is that the inclusion of a full set of time dummies renders INT insignicant. This is not really surprising: The synchronization of many liberalization steps leads to a very high partial correlation between the variable INT and the time dummies (a regression of INT on 8 time dummies (and D70-00 ) yields an R2 of 0.77). On the other hand, the time dummies, capturing a large part of the variation of INT, may also be interpreted to reect integration effects; of the ve time dummies that enter signicantly, all but one (for the period 19551960) take a positive value and their (net) level effect is comparable to that implied by the coefcient of INT. Against this background and since time-specic institutional changes have also been driven by European integration to some extent, we do not regard it as plausible to interpret the effect of INT as spurious; but of course, we cannot be sure that the dummies do not actually capture omitted variables unrelated to integration. Thus a skeptic might still argue that the time dummies reect the positive effect of institutional and structural factors that vary over time but not across countries, and that integration had no effect. Hence the variable INT is in some way also vulnerable to Rodriguez and Rodriks
5

Adding the level INT to the specication in column (b) does not change the results. INT is still signicant with de facto the same coefcient; INT remains insignicant.

Badinger: Growth Effects of Economic Integration

65

(2001) well-known critique (though their primary concern relates to the cross-country variation in institutional characteristics that may be mistakenly captured by trade variables). Even with an improved measurement of integration, collinearity problems will continue, to some extent inevitably, to aggravate the rm and unambiguous empirical establishment of the link between integration and growth. We carry on with our preferred model in column (b) in order to see whether our results are also sensitive to other robustness checks. We rst check the sensitivity with respect to changes in the estimation period, reestimating the model without factor accumulation (column (b)) for all possible sub-periods including at least 6 observations (30 years), which yields us 13 models. The coefcient of INT varies between 0.19 and 0.32 but always remains signicant at the 1 per cent level (see Table A1 in the Appendix for the detailed results). We also ran the regression for the subperiods 14 and 510 without D70-00 . Again the signicance level of INT is unchanged, but its coefcients for the periods 14 appear to be higher than for the periods 510. The signicance of this difference can be tested in a regression for the total period (110) by including an interaction term of INT and D70-00 . Its coefcient is negative as expected and signicant at the 10 per cent level (p-value: 0.055); the implied parameters for INT50-70 and INT70-00 amount to 0.43 and 0.21 respectively. In the light of the weak signicance of the interaction term, however, we continue with one coefcient for the whole time period, but add that the size of the implied growth effects over the total period hardly differs between the two specications. As shown by Levine and Renelt (1992), it is also important to check the robustness of the results against the inclusion of further variables. We add three control variables: First, one could object that INT simply measures catching-up in the course of post-war reconstruction. Against this can be held that by 1950 recovery from war was complete and Europes economies were back on their pre-war growth paths (Maddison 1995: 71). Nevertheless, we check the robustness of the results against including the initial level of output per worker (yi,t 1 ). Second, we include the rate of ination (proxied by the relative change in the GDP deator), since Henrekson et al. (1997) nd in their cross-section growth regression that the dummy for EC/EFTA membership becomes insignicant, when ination is controlled for. Third, we include the change in the share of trade in GDP (OPEN ), or its level (OPEN ), as general indicator for openness. Column (c) in Table 3 shows the results, when all variables are jointly added to the specication in column (b), but the conclusions do not change, whatever combination of the

66

Review of World Economics 2005, Vol. 141 (1)

variables is used or if the variables are added separately. The control variables are never signicant and the coefcient of the variable INT is hardly affected. The same holds true if the level of OPEN is included instead of its change. Repeating this robustness analysis for different estimation periods (see Table A1 in the Appendix for details) we obtained the following results: Including ination or openness never affects the signicance of INT. Including the initial level changes the signicance of INT in 6 of the 15 models: In 4 cases it remains signicant at the 10 per cent level; only in 2 cases is it rendered insignicant. This is probably due to the aforementioned fact that the coefcient of INT is smaller for the period 19702000, since all cases in which INT is fragile focus on this later period. Running the regression over the whole period 110 and controlling for the lower effect of INT since 1970 by an interaction term between INT and D70-00 , however, INT (and the interaction term) remains signicant at the 1 per cent level, whatever combination of the control variables is included. After all, we may carefully conclude that economic integration has had a level effect on the EU-15s post-war growth path, which appears to be have been more pronounced in the period from 1950 to 1970.6 A further concern often raised in the context of growth regression is the potential endogeneity of the right-hand side variables; also for economic policy measures such as integration one could argue that causality may run in the reverse direction: It may be politically easier to liberalize in periods of high growth, while in times of poor performance it may be tempting to introduce protectionist measures. To check the sensitivity of the results, we employ a rst-differences GMM estimator for the model in column (b). As instruments for the variable INT in second differences (INTit ), all available lags of its rst difference dated t 2 and earlier are used (INTi,t s , s 2). Though originally introduced in the context of dynamic panels (Arellano and Bond 1991), the extension of this GMM framework to problems like measurement error and endogeneity of the right-hand side variables is straightforward (Bond et al. 2001). Unfortunately, this approach implies a loss of three observations, which is particularly hurtful in our case, since we have to exclude the period of the customs union. To ensure comparability, Table 3 shows the results of both the LSDV (column (d)) and GMM estimation (column (e)) for this shorter period
It is well known that the LSDV estimator is biased in dynamic panels (see Nickell 1981). The conclusions for our dynamic models (including yi,t 1 ) do not change, however, when the rst-differences GMM estimator by Arellano and Bond (1991), a consistent estimator for dynamic panels, is used.
6

Badinger: Growth Effects of Economic Integration

67

from 1965 to 2000. INTi remains highly signicant; its coefcient even increases compared with the LSDV estimate. This result, however, has to be qualied in the light of the ambiguous results concerning the validity of instruments: A Sargan test of overidentifying restrictions cannot reject the null of valid instruments (p-value: 0.58). In contrast, the null of the absence of second-order serial correlation, a requirement for instrument validity, is rejected at the 10 per cent level (see Arellano and Bond (1991), for details on the instruments tests). A possible interpretation of the insignicant Sargan test in the presence of second-order serial correlation is that INTi,t might in fact be only predetermined, ruling out contemporaneous correlation between INTi,t and the error term i,t (i.e. E(INTi,t i,s ) = 0, all i, s < t instead of s t as in the case of endogeneity). Summing up, our preferred specication without factor accumulation is given by column (b) in Table 3. In a next step, we add factor accumulation in order to assess the importance of the respective channels in promoting the EUs post-war growth. Despite using several measures of human capital such as attainment rates or mean years of schooling from both the Barro and Lee (2000) as well as the de la Fuente and Domnech (2000) dataset, we could not nd a signicant and robust human capital variable. Thus, we only show the results for physical capital here. Levine and Renelt (1992) nd that investment ratios are robustly correlated with openness while growth of output is not, once investment is controlled for. It is thus interesting to test whether technology-led growth effects have been signicant in our sample. Column (f) in Table 3 shows the results including only the growth of physical capital per worker ( ln k); its coefcient is highly signicant and points at an elasticity of 0.35, a value which is strikingly similar to the EU-15s average share of capital income at the end of the 1980s as reported by Coe and Helpman (1995; see note of Table 3). The results when both INT and k are included (column (g)) are of higher interest to us: The coefcient of INT falls relative to the model without factor accumulation in column (b) as expected, but remains clearly signicant, indicating that technology-led growth has played a role.7 To address the endogeneity concerns with respect to ln k, one could again run a two-stage estimation, however, only at the cost of losing observations, let alone the problems in nding good instruments. In order to escape from this dilemma we impose the coefcients on ln k according to the country-specic income shares of capital reported by
7

As in the model without factor accumulation, tests for permanent (technology-led) growth effects yielded no signicant results.

68

Review of World Economics 2005, Vol. 141 (1)

Coe and Helpman (1995). The results for these restricted estimates, which actually correspond to a direct test of the empirical model (1a), are shown in column (h). The coefcient of INT is still highly signicant, though somewhat lower than the unrestricted estimate. Comparing the coefcient of INT in columns (g) and (h) with that of the model without factor accumulation (column (b)), we may carefully conclude that both investment-led and technology-led growth played a signicant role, with investment-led growth accounting for some 5063 per cent of the total effect. Here, the relative contribution of investment-led growth was calculated as residual by deducting the estimated technology-led growth effect from the total effect implied by the results in column (b). Of course, this issue can also be tackled from the other side, i.e. by calculating the technology-led growth effect as residual, deducting the estimated investment-led growth effects from the total effect. The investment-led growth effects are obtained by directly estimating model (1b), i.e. regressing the growth of the capital stock on INT (Table A2), and then translating this effect on the capital stock into output effects using either the estimated coefcients of ln k from column (g) or the corresponding capital shares (see note of Table 3). Since none of these approaches can a priori be said to be superior we provide a range of estimates of the possible distribution between technology and investment-led growth effects in the simulation below. Before proceeding with the simulation it is worth noting that in none of the models in Table 3, the hypothesis of a homogenous parameter for INT for all countries can be rejected; the same holds true for the direct estimates of the investment-led growth effects (Table A2); i.e. neither technology nor investment-led growth effects have fallen disproportionately on particular member states, or on small or large countries. We go on to use our preferred specications to simulate the level effects of integration. The preferred model without factor accumulation (Table 3, column (b)) is used to simulate the overall effect. The results are given in Table 4, which shows both the actual level of GDP per capita in 2000 as well as its hypothetical level if no integration had taken place since 1950 (i.e. INTi,t = 0, all i, t ). As can be seen from column (d), integration has induced sizeable level effects, amounting to some 26 per cent for the aggregate EU (or some 20 per cent in terms of actual values (b)); countryspecic values deviate only slightly, indicating that there have been no obvious asymmetries in the gains from integration. As outlined above, different approaches to assessing the relative contributions of investment and technology-led growth are possible. First, for a given total effect, either

Badinger: Growth Effects of Economic Integration

69

technology-led or investment-led growth effects can be estimated, with the contribution of the other channel being calculated as residuals. Second, in each case the estimated or the calibrated parameters of ln k can be used. Column (e) shows the minimum and maximum outcome for the share of investment-led growth effects in the total effect for each country. The overall results indicate that both integration-induced increases in efciency as well as induced investments played a signicant role in promoting the EU-15s post-war growth. Accounting for one-half to three-quarters of the overall effect, investment-led growth effects seem to have been slightly more important.
Table 4: Growth Effects of Economic Integration for EU Member States, 19502000
GDP per worker 2000 (a) AT BE DE DK ES FI FR GR IE IT NL PT SE UK EU 40,288 50,815 47,732 41,857 40,483 43,013 49,629 29,484 50,307 50,969 45,509 25,137 41,481 39,849 44,577 GDP per GDP per Total level capita 2000 capita 2000 effect as actual no integration % of (c) (b) (c) (d) 20,078 19,715 20,417 21,403 14,653 19,363 19,885 10,958 22,411 18,460 19,974 12,184 19,429 18,707 18,549 15,716 15,806 16,255 17,482 11,436 15,517 15,682 8,570 17,802 14,537 16,103 9,456 15,971 14,907 14,709 27.8 24.7 25.6 22.4 28.1 24.8 26.8 27.9 25.9 27.0 24.0 28.9 21.6 25.5 26.1 Investment-led effect as % of total effect from to (e) 53.0 52.7 52.8 52.5 53.1 52.7 52.9 53.0 52.9 52.9 52.6 53.1 52.4 52.8 52.9 72.0 71.9 80.3 67.6 79.7 67.5 71.2 58.7 57.3 76.8 78.8 66.9 67.4 62.8 73.2

Note: (a), (b), and (c) in US$ at 1990 prices, 1990 PPP. Per capita values calculated by multiplying the simulated values (per worker) with the employment/population ratio.

It is reassuring that our results are not far off those from other studies on the relationship between trade (openness) and growth. In particular, Henrekson et al. (1997), in a cross section covering the period 19751987, obtain an effect of European integration (measured with EC/EFTA mem-

70

Review of World Economics 2005, Vol. 141 (1)

bership dummies) on the growth rate in a range from 0.6 to 1.3 per cent p.a. (which the authors favour to interpret as permanent effect on the growth rate). With a level effect of some 26 per cent over 50 years, the effect on the average growth rate implied by our results amounts to some 0.5 per cent, which is in line with the Henrekson et al. study. In contrast to their interpretation as a permanent effect, however, our results suggest that the effects of integration are only of temporary nature. Our results are also compatible with the closely related literature on trade and growth. Greenaway et al. (1998), in a panel approach with 73 countries (mainly developing countries), obtain a level effect of openness (measured with the SachsWarner index) of some 46 per cent; regarded as long-run difference in GDP per capita between more open and more closed economies they regard this as a reasonable number. The comprehensive survey of studies on the relationship between trade and growth by Lewer and Van den Berg (2003) nds surprisingly consistent results: a 1 percentage point increase in export growth is associated with a one-fth percentage point increase in economic growth. Against the background of the rapid growth of the EU-15s trade since 1960 (some 6 per cent p.a.) and the signicant contribution of European integration to the growth of trade (Badinger and Breuss 2004), our estimates are of a comparable dimension. Our results concerning the role of investment-led and technology-led effects are broadly consistent with the few previous studies that attempt to distinguish between the effects of trade on factor accumulation and technology. In Frankel and Romer (1999), two-thirds of the growth effect (of trade) materialize over technology, one-third over (physical and human) capital accumulation. Wacziarg (2001), using a simultaneous equation model, nds that 63 per cent of the overall effect are investment-led, 22.5 per cent technology-led (the rest is mainly due to stabilizing economic policy). Our results reinforce the view that both induced capital accumulation and induced technological advances are important channels via which growth effects of economic integration materialize. As nal important point, our results have to be interpreted in a broader international setting. In comparing the EUs post-war growth performance with that of other countries, it is important to bear in mind that our integration variable reects European integration and GATT liberalization. Thus European integration itself, strictly speaking, only accounts for integration that went beyond GATT liberalization. Other countries (such as the United States) also participated in the GATT agreement and thus also experienced

Badinger: Growth Effects of Economic Integration

71

substantial economic integration. Nevertheless, progress in integration was certainly more pronounced for the EU countries than for the United States. If integration generated level effects as suggested by the estimates, the EU should have caught up in terms of real GDP per worker against the United States. This has indeed been the case: In 1950 the EUs GDP per worker was some 40 per cent that of the United States; in 2000 it amounted to some 80 per cent (see Maddison (1995) for a more detailed discussion of this catching-up process). Since the European economies were back on their pre-war growth path by 1950 (Maddison 1995: 71) this catching-up cannot be purely attributed to reconstruction and it may be argued that the EU countries would have kept farther behind the United States without European integration. The question whether the post-war evolution of living standards between the EU and non-EU members is signicantly related to European integration may also be judged more rigorously by regressing the EUs GDP per worker relative to that of some control country j (yEU ,t /yj,t ; j = the United States, Australia, New Zealand, Japan, Canada, Norway, Switzerland, and Iceland) on the (lagged) level of the EU-15s integration (INTEU ,t 1 ):8 yEU ,t 1 sEU ,t uEU ,t yEU ,t =+ + + + INTEU ,t 1 + t . yj,t yj,t 1 sj,t uj,t (6) The lagged dependent variable is included to allow for a more general dynamic structure of the model; two further variables are included: the relative investment ratio, sEU ,t /sj,t , to control for neo-classical catching-up, and the relative unemployment rate, uEU ,t /uj,t (taken from the AMECO database), since typical increases in EU unemployment tended to make GDP per worker grow even without real GDP growth. Table 5 reports the estimation results of (6) for the time period 1960 2000, using several control countries. Where the relative unemployment rate or the relative investment ratio turned out insignicant, they were excluded from the nal regression (the values reported for the other variables and the regression statistics are that of the nal model). For all control countries
8

The integration measure for the EU is calculated as weighted average of the country values (see Section 3) and divided by 100 (to obtain a more comfortable coefcient), where the respective countries shares in the EUs total trade (again imports and exports) are used as weights. The lagged value is chosen because it yields a (slightly) better t. This is not implausible since integration effects require some time to materialize. The conclusions are not altered, however, when the contemporaneous value is used.

72

Review of World Economics 2005, Vol. 141 (1)

Table 5: Estimation Results for Catching-Up Specication (6), 19602000

Dependent variable: yEU ,t /yj,t US Intercept yEU ,t 1 /yj,t 1 sEU ,t /sj,t uEU ,t /uj,t INTEU ,t 1 Implied level effect (%)a Regression statistics LM-SCb 2.85 SEE 0.008 0.996 Adj. R2 CA AU NZ JP CH NO IS 0.564 (3.94) 0.417 (3.23) 0.094 (2.72) 0.003 ( 2.82) 0.090 (3.26) 10.7 6.82 0.028 0.880

0.001 0.078 (0.04) (3.33) 0.898 0.897 (23.58) (22.25) 0.044 0.009 (2.63) ( .33) 0.003 0.006 ( 0.44) (0.25) 0.047 0.033 (2.54) (1.72) 43.1 9.31 0.010 0.994

0.144 0.201 0.118 (1.37) (2.681) ( .94) 0.531 0.747 0.851 (5.29) (6.99) (9.69) 0.177 0.034 0.308 (2.62) (0.99) (1.74) 0.056 0.001 0.002 (3.06) (0.79) (0.32) 0.159 0.158 0.098 (4.33) (2.04) (1.75) 23.9 5.42 0.018 0.931 23.0 7.64 0.028 0.979 38.2 0.989 0.022 0.989

0.031 0.196 (2.16) (2.45) 0.967 0.857 (43.99) (12.50) 0.092 0.050 ( 1.37) ( 2.24) 0.001 0.007 ( 1.26) (1.48) 0.019 0.016 (1.89) ( 1.60) 46.3 11.46 0.012 0.995 (0) 3.89 0.017 0.849

, , indicate signicance at the 10, 5 and 1 per cent level respectively. Note: t -values in parentheses, calculated using White heteroscedasticity-consistent standard errors. Estimation period for AU is 19642000 for reasons of data availability. a Calculated as difference between actual relative GDP per worker in 2002 and the hypothetical value no INT )/y without integration ((yEU ,2000 yEU j,2000 ), divided by the actual relative GDP per worker in ,2000 no INT /y 2000. The hypothetical scenario without integration (yEU ,2000 j,2000 ) is obtained from a dynamic simulation of the estimated equation (6), assuming that the level of integration remained at that of the rst observation (residuals were included to reproduce the actual values in the baseline scenario). b LM test of Breusch (1978) and Godfrey (1978) for serial correlation, assuming a maximum order of ve; chi-square distributed with ve degrees of freedom (choosing a lower order from one to four produces no further signicant results). For CA and CH where the residuals exhibit serial correlation NeweyWest standard errors were used (explicit adjustment for autocorrelationthe more appropriate answer to serial correlation in the presence of a lagged dependent variabledoes not change the results for the integration variable, suggesting that the degree of inconsistency is negligible).

except Norway the integration variable enters signicantly at least at the 10 per cent level.9 This suggests that the EU-15s integration has supported the EUs catching-up process, or to put it differently: Without integration
9

In three cases the results are sensitive to including the insignicant investment ratio and unemployment rate: For CH and NZ the coefcient of INT becomes insignicant; for NO it becomes negatively signicant.

Badinger: Growth Effects of Economic Integration

73

the EU would have kept (farther) behind the living standards of other OECD countries.10 The level effects implied by the estimates are reported in the lower part of Table 5 and range from 10.7 (0 for Norway) to 46.3 per cent, compared with the level effect of 20 per cent obtained in our panel estimates (Table 4). Note that in the regressions with the largest level effects implied, the standard errors of the coefcients of INTEU are fairly large, such that the 20 per cent result is conveniently contained in standard condence intervals. There is no convincing explanation for the insignicant result for Norway: The fact that it underwent a very similar integration scheme as the EU members is also true for Switzerland and Iceland where a signicant result is obtained; it may be due to the little variation in the dependent variable, since the living standards of the EU and Norway evolved very similar, implying an almost constant dependent variable. One could argue that it would be a better approach to replace the variable INTEU (which measures the relative progress in the EU-15s integration, see Section 3) by the ratio of the absolute level of integration of the EU to that of the control country. This is ruled out for reasons of data availability, however; after all, the reduction of our sample to the EU-15 is the cost of using an improved integration measure. Against this background, (6) is a feasible compromise which allows us to judge the results for the EU sample in a broader international setting and provides us with an additional robustness check. The particular values of the coefcients, however, should not be overstressed. Overall the signicant results for the integration variable buttress the conclusions obtained so far; at the same time the suggested contribution of the EU-15s integration to its catching-up process in the post-war period adds another qualication: The results may be specically within-EU effects and cannot easily be generalized. 6 Conclusions This paper provides support for the hypothesis that European integration has signicantly contributed to the post-war growth performance of the
10

Of course, assuming that the EU-15s integration had not taken place ceteris paribus is somewhat articial, particularly in comparison with the other European countries (CH, IS, NO) that did not join the EU but who underwent very similar integration schemes (EFTA, free trade arrangements with EC, European Economic Area (except CH)).

74

Review of World Economics 2005, Vol. 141 (1)

current EU member states. Although the results imply that growth effects have only been of temporary nature, the suggested level effects are sizeable: GDP per capita of the EU would be approximately one-fth lower today if no integration had taken place since 1950. An important qualication is that the results are not completely robust to controlling for time-specic effects which are highly correlated with our integration variable due to the synchronization of many integration steps. Additional research is needed to establish more rmly the link between integration and growth, despite increasing and surprisingly consistent evidence: Until we agree on a logical explanation why trade [integration] and growth go together, it is not likely that we will agree that the statistical results have settled the matter (Lewer and Van den Berg 2003: 391). The size of the level effects suggested by our estimates supports Temples argument that undervaluing level effects is fundamentally misguided. ... It should not worry us that long-run growth ... is unresponsive to policy; instead level effects ... should be central to policy analysis (Temple 2003: 509). In contrast to previous studies, we nd that the ties between integration and growth run both over increases in efciency as well as induced investments. Accounting for one-half to three-quarters of the total effect, however, investment-led growth seems to have been slightly more important. A further noteworthy result is that the hypothesis of symmetric gains from integration cannot be rejected, i.e. no obvious small- or large-country bonus appears to exist. Our estimates also suggest that the EUs post-war catching-up process vis--vis the United States and other countries was supported signicantly by the process of European integration. Hence, the results obtained here may be specically within-EU effects and cannot easily be generalized, e.g. to countries that have moved very close to the technology frontier (such as many EU member states today). Taken together with the rejection of permanent growth effects this has an important policy implication: The growth stimulating effect of integration, achieved so far, holds no promise for the EUs future performance. To achieve the ambitious goal set out by the European Council in the Lisbon Strategy in 2000 (becoming the most competitive and dynamic knowledge-based economy), or to keep at least up with the United States in the twenty-rst century, substantial challenges such as making the Single Market more dynamic, boosting investment into knowledge and improving the macroeconomic policy framework of European Monetary Union (Sapir et al. 2003)will have to be met by the EU and its members states.

Badinger: Growth Effects of Economic Integration

75

Appendix
Table A1: Robustness Analysis
9 Obs. Without D70-00 1-9 2-10 1-8 2-9 3-10 1-7 2-8 3-9 4-10 1-6 2-7 3-8 4-9 1-4 4-10 50-95 60-00 50-90 55-95 60-00 50-85 55-90 60-95 65-00 50-80 55-85 60-90 65-95 50-70 70-00 8 Obs. 7 Obs. 6 Obs. 0.278 0.273 0.274 0.274 0.210 0.307 0.268 0.207 0.220 0.319 0.305 0.190 0.217 0.426 0.256 rob rob rob rob rob rob rob rob rob 10% rob rob rob rob rob rob rob rob 10% frag rob rob rob rob rob rob rob rob rob rob 10% 10% rob rob rob rob rob rob rob frag rob rob

INTi,t a

Control variablesb ln yi,t 1 rob i,t rob OPENi,t rob

a Coefcient of INT (no control variables added); signicant at the 1 per cent level in all cases. b Results for i,t respective period, when control variables are added: rob ... robust, i.e. remains signicant at the 1 per cent level after including the respective variable; frag ... fragile, i.e. rendered insignicant by the inclusion of the respective variable.

Table A2: Estimates of Investment-Led Growth Effects for EU Member States, 19502000
Dependent variable: ln ki,t (a) Intercept D70-00 INTi,t ln ki,t 1 F-tests for parameter homogeneity Intercept D70-00 INTi,t Regression statistics SEE R2 Adj. R2 Period 5.006 3.399 0.510 (6.90) (b) 23.509 1.227 0.472 (7.67) 1.830 ( 4.48) 1.74 1.00 0.21

2.60 1.65 0.23

1.482 1.373 0.673 0.722 0.590 0.649 19502000 (T = 1, ..., 10)

See note of Table 3. Column (b): check for robustness against including the initial level of capital per worker.

76 References

Review of World Economics 2005, Vol. 141 (1)

Arellano, M., and S. Bond (1991). Some Tests of Specication for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies 58 (2): 277297. Arellano, M., and S. Bond (1998). Dynamic Panel Data Estimation Using DPD98 for GAUSS: A Guide for Users. Mimeo. Institute for Fiscal Studies, London. Badinger, H., and F. Breuss (2004). What Has Determined the Rapid Post-War Growth of Intra-EU Trade? Review of World Economics/Weltwirtschaftliches Archiv 140 (1): 3151. Balassa, B. (1961). The Theory of Economic Integration. London: Allen & Unwin. Baldwin, R. (1989). Growth Effects of 1992. Economic Policy 9: 247282. Baldwin, R. E. (1993). On the Measurement of Dynamic Effects of Integration. Empirica 20 (2): 129144. Baldwin, R. E., and E. Seghezza (1996). Growth and European Integration. Towards an Empirical Assessment. CEPR Discussion Paper 1393. Centre for Economic Policy Research, London. Barro, R. J., and J. W. Lee (2000). International Data on Educational Attainment: Updates and Implications. Working Paper 42. Center for International Development at Harvard University. Dataset available at: http://www2.cid.harvard.edu/ciddata/ Ben-David, D. (1993). Equalizing Exchange: Trade Liberalization and Income Convergence. Quarterly Journal of Economics 108 (3): 653679. Ben-David, D. (2001). Trade Liberalization and Income Convergence: A Comment. Journal of International Economics 55 (1): 229234. Benhabib, J., and M. Spiegel (1994). The Role of Human Capital in Economic Development: Evidence from Aggregate Cross-Country Data. Journal of Monetary Economics 34 (2): 143173. Bond, S., A. Hoefer, and J. Temple (2001). GMM Estimation of Empirical Growth Models. CEPR Discussion Paper 3048. Centre for Economic Policy Research, London. Breusch, T. (1978). Testing for Autocorrelation in Dynamic Linear Models. Australian Economic Papers 17 (31): 334355. Breuss, F. (1983). sterreichs Auenwirtschaft 19451982. Vienna: Signum. Coe, D. T., and E. Helpman (1995). International R&D Spillovers. European Economic Review 39 (5): 859887. De la Fuente, A., and R. Domnech (2000). Human Capital in Growth Regressions: How Much Difference Does Data Quality Make? CEPR Discussion Paper 2466. Centre for Economic Policy Research, London. Dataset available from: http://fuster.iei.uv.es/rdomenec El-Agraa, A. M. (2001). The European Union, Economics & Policies. London: Prentice Hall.

Badinger: Growth Effects of Economic Integration

77

Frankel, J. A., and D. Romer (1999). Does Trade Cause Growth? American Economic Review 89 (3): 379399. GATT (1994). The Results of the Uruguay Round of Multilateral Trade Negotiations: Market Access for Goods and Services, Overview of the Results. Geneva: GATT. Godfrey, L. (1978). Testing Against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables. Econometrica 46 (6): 12931302. Greenaway, D., W. Morgan, and P. Wright (1998). Trade Reform, Adjustment and Growth: What Does the Evidence Tell Us. Economic Journal 108: 15471561. Grossman, G. M., and E. Helpman (1997). Innovation and Growth in the Global Economy. Second edition. Cambridge, Mass.: MIT Press. Henrekson, M., J. Torstensson, and R. Torstensson (1997). Growth Effects of European Integration. European Economic Review 41 (8): 15371557. Jones, C. I. (1995). Time Series Tests of Endogenous Growth Models. Quarterly Journal of Economics 110 (2): 495525. Landau, D. (1995). The Contribution of the European Common Market to the Growth of Its Member Countries: An Empirical Test. Review of World Economics/Weltwirtschaftliches Archiv 131 (4): 774782. Lewer, J. J., and H. Van den Berg (2003). How Large Is International Trades Effect on Economic Growth. Journal of Economic Surveys 17 (3): 363396. Levine, R., and D. Renelt (1992). A Sensitivity Analysis of Cross Country Growth Regressions. American Economic Review 82 (4): 942961. Maddison, A. (1995). Monitoring the World Economy 18201992. Paris: OECD. Nickell, S. (1981). Biases in Dynamic Models with Fixed Effects. Econometrica 49: 14171426. Nuxoll, D. A. (1994). Differences in Relative Prices and International Differences in Growth Rates. American Economic Review 84 (5): 14231436. Rivera-Batiz, L. A., and P. M. Romer (1991). Economic Integration and Endogenous Growth. Quarterly Journal of Economics 106 (2): 531555. Rodriguez, F., and D. Rodrik (2001). Trade Policy and Economic Growth: A Sceptics Guide to the Cross-National Evidence. In G. Bernanke and K. S. Rogoff (eds.). NBER Macroeconomics Annual 2000. Cambridge, Mass.: MIT Press. Romer, P. M. (1990). Endogenous Technological Change. Journal of Political Economy 98 (5): 71102. Sapir, A., et al. (2004). An Agenda for a Growing Europe. The Sapir Report. Oxford: Oxford University Press. Slaughter, M. (2001). Trade Liberalization and Per Capita Income Convergence: A Difference-in-Differences Analysis. Journal of International Economics 55 (1): 203228. Smith, A. (1789). An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by Edwin Cannan (1904). London: Methuen. Available from http://www.econlib.org/library/Smith/smWN1.html

78

Review of World Economics 2005, Vol. 141 (1)

Smith, A., and A. J. Venables (1988). Completing the Internal Market in the European Community: Some Industry Simulations. European Economic Review 32 (7): 15011525. Temple, J. (1999). The New Growth Evidence. Journal of Economic Literature 37 (1): 112156. Temple, J. (2003). The Long-Run Implications of Growth Theories. Journal of Economic Surveys 17 (3): 497510. Vanhoudt, P. (1999). Did the European Unication Induce Economic Growth? In Search of Scale Effects and Persistent Changes. Review of World Economics/Weltwirtschaftliches Archiv 135 (2): 193220. Waczairg, R. (2001). Measuring the Dynamic Gains from Trade. World Bank Economic Review 15 (3): 393429. WTO (1995). Trading into the Future. Geneva. Young, A. (1998). Growth without Scale Effects. Journal of Political Economy 106 (1): 4163.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.