Real Convergence Research Articles

Structural time series models and synthetic controls—assessing the impact of the euro adoption

So far, empirical research on an ex-post benchmark of the euro adoption has relied on the synthetic control method by Abadie & Gardeazabal (Am Econ Rev 93:112-132, 2003) and Abadie et al. (J Am Stat Assoc 105:493-505, 2010, Am J Polit Sci, 59:495-510, 2015). However, the evidence obtained with this method is not overly consistent, leading to the conclusion that the method is not too robust to different settings of the adjustment screws. Using a new method developed by Harvey & Thiele (J Appl Econ 36:71–85, 2021) based on structural time series models, I find that France and Italy are clear losers from the euro while there are no real winners until 2019. Spain, Netherlands, Greece gain in the period before the financial crisis, but afterwards they lose. In fact, only the German economy is robust to the two crises but it loses until 2008. Relating the theories of optimum currency areas to the estimated gaps of the euro adopters from their synthetic controls, I find that openness, real convergence, and net migration are the main drivers of gains from a euro adoption, while the main drivers of losses are low levels of competitiveness, fiscal instability and labour market rigidity. Examining the crisis channels of the financial and euro crisis shows that fiscal instability, labour market rigidity and also business cycle synchronization cause large losses during the crises. Net migration helps to dampen these shocks. While openness is beneficial during the pre-crises period, it cannot help dampen the shock of the crises.

Specifics in Introduction and Functioning of the Currency Board in Bulgaria

The article studies two main aspects of functioning of the currency board in Bulgaria: its characteristics and its specifics and peculiarities.
 Concerning the characteristics of the currency board in Bulgaria, the attention is focused on several theoretical matters of the nature of the currency board: mechanism for introduction of the currency board; choosing the foreign currency, to which the local monetary unit is to be fixed; financing the initial currency reserve, in order for the currency board to start functioning; setting the fixed exchange rate to the reserve currency; establishing the amount of coverage of the quantity of cash in circulation by the currency reserves; administration of the currency board; implementation of the function “lender of last resort” in cases of liquidity crisis; supervision of the commercial banks’ operation.
 Each country is characterized by its specifics in terms of management of public finances, condition of the real (non-financial) sector, service sector, monetary and banking system. These specifics are reflected in the monetary boards, introduced in the individual countries.
 The article provides a detailed analysis of the specifics of the currency board in Bulgaria.
 The options for an independent monetary policy of the central bank are heavily restricted, and on the other hand, the currency board attained the goal of its policy – ensuring of price stability. As of the present moment, Bulgaria joined the exchange rate mechanism (ERM II) in 2020 and makes every effort to cover the criteria for real convergence.

Real Convergence in the Euro Area: Mirage or Reality?

The aim of this paper is to study the convergence patterns in the European Union and the Euro Area between 2000 and 2019 by means of the absolute and conditional β- and σ-convergence, considering cohesion not opposite but complementary to competitiveness. By estimating cross-sectional regressions, we have found evidence favouring the absolute β-convergence for the Eurozone (19) and the European Union, illustrating that the initially poorer members experienced higher GDP per capita growth rates than the developed economies. The average catching-up speed recorded between 2000 and 2019 in the European Union was 2.5%, while in the Eurozone (19), it was 2.3%. Based on panel data and seemingly unrelated regressions, we have illustrated that improvement in the competitiveness of Member States by promoting investment, trade openness, high levels of labour productivity, education and the implication of citizens in society positively influenced the GDP per capita growth rates between 2000 and 2019. Finally, the estimation of σ-convergence based on the standard deviation led us to conclude that income gaps narrowed across the European Union and the Eurozone (19) between 2000 and 2019, having, in contrast, an upward trend among the early adopters of the euro. The original elements of the paper derive from the comparative analysis of convergence in the Euro Area and the European Union and the study of the economic growth process from the perspective of competitiveness-related variables. In this respect, the study emphasizes the role of human capital in generating prosperity gains at the Community level.

The Real Convergence of THE NMS-10 to THE EU-15

The goal of this article is to study the group and the individual convergence of ten new member states - Bulgaria, the Czech Republic, Poland, Romania, Slovakia, Estonia, Hungary, Latvia, Lithuania and Slovenia (known as the NMS-10), to the fifteen old member states – Austria, Finland, Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, the United Kingdom and Sweden (referred to as the EU-15). A beta convergence approach was applied on three samples of annual Eurostat data (2000-2008, 2009-2019 and 2000-2019). The results from the empirical research show that the NMS-10 converged to the EU-15 both absolutely and conditionally in all analyzed periods. However, five new member states only (the Czech Republic, Estonia, Latvia, Lithuania and Romania) converged individually to the old member states over 2000-2019. The other five new member states - Bulgaria, Hungary, Poland, Slovakia and Slovenia, diverged from the EU-15. Fiscal balances, which took into account the economic cycle phase, encouraged a rise in the living standard in the old and the new member states prior to and following the global financial crisis. However, government debt and government consumption impeded the growth of the PPS per capita GDP in the EU-15 and the NMS-10 after the global economic crisis.

Ready or not? Constructing the Monetary Union Readiness Index

Abstract While all EU Member States can join the group's monetary union, the euro area, some members are far more ready for the adoption and use of the single European currency. Here, we construct a new Monetary Union Readiness Index (MURI) for the EU Member States. The theoretical framework of the index is built on the economic theory of Optimal Currency Areas and EU regulations such as the Treaty and the Maastricht criteria, and the Regulation on the Macroeconomic Imbalance Procedure. The index measures (i) nominal convergence, (ii) real convergence, and (iii) macroeconomic stability. The MURI Index provides an easy to use real-time policy tool to evaluate both candidate and current euro area members. Hence, it complements, aggregates and communicates key information in annual convergence reports and in official statistics. Our evaluation finds that Austria, Finland, Denmark, Sweden and Germany showed the highest level of compliance with the different euro area criteria in 2018, while Greece, Cyprus, Romania, Spain, and Italy were the least compliant.

Do Human Capital and Institutional Quality Contribute to Brazil's Long Term Real Convergence/ Divergence Process? A Markov Regime-Switching Autoregressive Approach

Do Human Capital and Institutional Quality Contribute to Brazil's Long Term Real Convergence/ Divergence Process? A Markov Regime-Switching Autoregressive Approach

ПРОЦЕС КОНВЕРГЕНЦІЇ ГЛОБАЛЬНОГО ЕКОНОМІЧНОГО РОЗВИТКУ

The current stage of globalization creates a number of controversial problems, one of which is the growing disparities in economic development between developed and developing countries. Their solution places certain demands on the economic scientific community, which are related to finding adequate answers to the challenges of time. One of the main tasks in this direction is to implement a comprehensive approach to the study of the process of convergence of global economic development. Noting the intensification of scientific research by the European and domestic scientific community in various thematic areas of convergence of global economic development, it should be noted the lack of publications in which this scientific and practical problem was solved taking into account the specifics of different countries belonging to the modern world system. With this in mind, the purpose of the study is to determine the nature and content of the process of convergence of global economic development and identify problems that arise in overcoming the asymmetry between developed and developing countries. In the process of realization of this goal the influence of economic integration on the internationalization of economic life is revealed, the factors that accelerate the process of convergence of global economic development and its manifestations at the level of developed and developing countries are identified. The relationship between economic convergence, global synchronization and the global business cycle has been established. The scientific novelty of the study is to substantiate, based on the creative use of scientific publications of foreign and domestic scientists, ways and directions of achieving real convergence between countries belonging to the core of the world system, its semi-periphery and periphery For results of the study made some generalizations and conclusions that do not confirm the effect of "catching up" development for the vast majority of African and Asian countries, in contrast to post-socialist European countries. It is noted that solving the problem of convergence of global economic development is important for Ukraine. This is the one of the promising direction of further scientific development of the research problem.

Real Convergence in the European Union. Bridging the Gap between the New and Old Member States

One of the fundamental pillars of the European Union aims at the convergence of economic performances among its Member States. This objective has become increasingly challenging with the advancement of the integration process from the customs union to the economic and monetary union, from the six founding Members to twenty-seven European states. The aim of this paper is to study real convergence in the European Union between 2000 and 2019 and conducting also a comparative analysis between the New and the Old Members. The methodological tools imply absolute and conditional β- and σ-convergence. By using cross-sectional regressions, we have found evidence in favour of the absolute β-convergence hypothesis, as the initially poorer Members experienced higher GDP per capita growth rates than the developed economies. The average catching-up speed in the European Union was 2.5%, while the Central and Eastern Members experienced a higher convergence rate, which reached 3.6%. Moreover, by applying panel regressions, we have found evidence supporting the conditional convergence hypothesis, the study emphasising the role of macroeconomic, social, and governance-related variables in promoting economic growth. Our research suggests that investment and trade had a major role in enhancing economic growth both at the aggregate and subgroup level. Finally, the paper illustrates that β-convergence was accompanied by a reduction of disparities within the European Union. However, the global financial crisis hampered the convergence process among the Old Members. The paper suggests that although the Central and Eastern European countries made important progress in terms of catching-up, convergence of economic performance in the European Union has not been reached so far. By contrast, the modest growth rates and the exacerbation of income differentials between the Old Members might call into question the perspective to achieve this objective in the short term.

Real convergence in Central and Eastern Europe. A comparative analysis of countries and regions

Abstract One of the fundamental pillars of the European Union aims the convergence of economic performances between countries and regions. This objective has proved to be increasingly difficult to achieve with the expansion of the regional group towards the Central and East of the continent. The aim of this paper is to study real convergence in the New Member States from Central and Eastern Europe, by taking into consideration the evolution of GDP per capita between 2000 and 2018. In this respect, we have conducted a comparative analysis between countries and regions using β- and σ-convergence. By applying cross-sectional regressions, we have identified a strong relationship between the initial level of income of the Central and Eastern European countries and the subsequent growth rates, the average catching-up speed reaching 3.6%. Moreover, β-convergence was accompanied by a reduction of income divergences between Central and Eastern European Members. In contrast, our analysis suggests a weaker process of convergence between regions compared to countries, the convergence rate reaching 1.7% per year. Furthermore, by studying the intra-national patterns, we have illustrated that the capital regions have consolidated their relative position in the majority of the Central and Eastern Member States to the detriment of the other territorial units. Consequently, the paper suggests that convergence across countries was accompanied by an increase of intra-national disparities between regions in Central and Eastern Europe.

Real Convergence in EU: Is There a Difference Between the Effects of the Pandemic and the Global Economic Crisis?

This paper aims to shed some light on the real convergence process among EU economies in the context of the COVID-19 pandemic crisis in comparison to the real convergence in 2008, when the last financial crisis erupted. According to entropy method results, the most pronounced difference between effects of the current pandemic and the global financial crisis are registered in the unemployment rate, while the difference in the current account balance and GDP per capita are much less noticeable. The results of the entropy method also suggest that the greatest difference among EU economies in 2020 is registered in the current account deficits; a slightly lower difference is registered in the unemployment rate, while the divergence in GDP is much less pronounced. To explain the results of the entropy method, a hierarchical cluster analysis is performed and three clusters are derived. Based on the identified characteristics of the derived clusters, some policy recommendations for overcoming the current crisis are defined.

Territorial Cohesion and the Pandemic in Romania

Abstract Convergence and economic and social cohesion remain priorities for the EU, beyond failures to achieve the objectives of the ‘Europe 2020’ strategy. Convergence and territorial cohesion, as a prerequisite for sustainable and durable development, have been the fundamental objectives that generated and developed the strategic planning in the EU, including through the two global strategies, ‘Lisbon’ and ‘Europe 2020’. The sustainability of these processes, even in periods of high economic growth, is questionable since real national convergence is based in many countries, including Romania, on large and widening divergences between regions and counties. In recent years, Romania has seen one of the most enhanced improvements in convergence compared to the EU average, from 60% in 2016 to 69% of the European average in 2019 respectively. During the same period, disparities between regions and counties have deepened. More than 10 years after EU accession and participation in the Community cohesion policy, there is still a third of the counties with less than 70% of the national average of gross domestic product per capita. The health crisis has deeply affected economic activity, but in a differentiated way, depending on the specific territorial economic structures. As a result, the objective of improved and sustainable real convergence, by bringing regions and counties closer together in terms of their level of development, is receding. The economic situation in the counties in 2020 indirectly provides support for assessing the impact of the pandemic on the territorial cohesion process. The implicit conclusion revealed by the latest statistical data is that the level of development has been the support for better resilience to the health crisis. Although the restrictions on international movement and the closure of tourist and industrial capacities have had general validity, the counties with a higher degree of disparity have been more affected.

Testing Real Convergence as a Prerequisite for Long Run Sustainability

The main objective of this research is to estimate the degree of real convergence of the countries that joined the European Union between 2004–2013 as an essential precondition for sustainable accession to the Euro Area. Through this study, we tried to create a clear, real and comparative image for the downward trend in the dispersion of the GDP/capita and the speed by which countries with different integration stages achieve the real economic convergence to equilibrium level. In this respect, we tested real convergence by regression models. Further, in order to verify the robustness of the results we applied a cluster analysis. The main results show that non-Euro Area countries have a tendency to individually reduce income disparities with the Euro Area average, but do not register a convergent economic growth and do not form a homogeneous convergence cluster, unlike the newer Euro Area Member Countries. Another representative result is that the Czech Republic seems to be the best prepared country to adopt the single currency in a sustainable way, while Bulgaria is at the opposite pole.

Nominal, Structural and Real Convergence of the EU Candidate Countries’ Economies

Abstract Despite the significant academic interest in the economic cohesion, the various aspects of convergence and the ways they can be measured still remain theoretically unclear. These are issues of extreme political significance, especially for countries aspiring for EU and euro area membership. The goal of this paper is to consolidate a variety of theoretical views on the convergence and its measurement and use it as the basis to assess the progress and the current state of economic convergence to the EU of the four candidate countries. The interrelation between the three forms of convergence in the different phases of the economic cycle is studied and the slobs in the ways the convergence is measured are outlined. The study reveals large differences between the candidate countries in achieving convergence with the EU. Their experiences do not confirm the positive relationship between nominal and real convergence. The structural convergence considered as convergence of sectoral structure has but little impact on the real convergence.

A Theoretical View of the Current Situation on Economic Integration in the EU Countries that are not Part of the Eurozone

The European Union (EU) has developed dramatically in the last two decades as new member nations have joined. Since the establishment of the EU Single Market, the number of EU member states has increased from 12 to 28 (27 after Brexit).The process of European Union integration of the countries of Southeast Europe has brought a lot of progress, but again the real convergence in terms of real GDP per capita remains a current challenge.In this paper, we will look at the main types of integrations that embrace different countries in different situations. One of the most important processes that affect the economic development of these countries is economic integration. During this process, member countries agree to coordinate their trade and fiscal/monetary policies.
 
 Received: 2 June 2021 / Accepted: 10 July 2021 / Published: 15 July 2021

Time stability of the impact of institutions on economic growth and real convergence of the EU countries: implications from the hidden Markov models analysis

Research background: It is not straightforward to identify the role of institutions for the economic growth. The possible unknown or uncertain areas refer to nonlinearities, time stability, transmission channels, and institutional complementarities. The research problem tackled in this paper is the analysis of the time stability of the relationship between institutions and economic growth and real economic convergence. Purpose of the article: The article aims to verify whether the impact of the institutional environment on GDP dynamics was stable over time or diffed in various subperiods. The analysis covers the EU28 countries and the 1995?2019 period. Methods: We use regression equations with time dummies and interactions to assess the stability of the impact of institutions on economic growth. The analysis is based on the partially overlapping observations. The models are estimated with the use of Blundell and Bond?s GMM system estimator. The results are then averaged with the Bayesian Model Averaging (BMA) approach. Structural breaks are identified on the basis of the Hidden Markov Models (HMM). Findings & value added: The value added of the study is threefold. First, we use the HMM approach to find structural breaks. Second, the BMA method is applied to assess the robustness of the outcomes. Third, we show the potential of HMM in foresighting. The results of regression estimates indicate that good institution reflected in the greater scope of economic freedom and better governance lead to the higher economic growth of the EU countries. However, the impact of institutions on economic growth was not stable over time.

Bulgaria in the Eurozone – Other Countries’ Experience and Comparisons

On July 10 2020 Bulgaria joined the preparatory mechanism for the Eurozone ERM II, but the opinions expressed are still divided. The author’s opinion is that in the debate for or against Bulgaria joining the Eurozone, the actual data provides the strongest arguments. Economic indicators and facts about five former socialist countries that are already in the Eurozone are presented in the paper. There are solid arguments in favor of joining in the analysis of the three Baltic countries – Estonia, Latvia and Lithuania, as well as Slovenia and Slovakia. These countries’ development as part of the monetary union and their economic indicators after this important step show their goal for real convergence with developed European economies. The author accepts two issues as especially important – what happens to inflation in these economies after joining the Eurozone and what the comparison concerning real convergence shows. Croatia, along with Bulgaria, has become a part of ERM II and the Banking Union, hence why it is also included in the analysis.

The Sling Effect: Croatia and SEE After the Fall of the Berlin Wall

The concentration of real convergence in a short period before the Great Recession (2001-2008) is a characteristic shared by many countries, but it was particularly pronounced in Croatia, Serbia, Bosnia and Herzegovina and Bulgaria. Bulgaria managed to converge after the Great Recession, but convergence in other mentioned countries was meagre; Slovenia even diverged since 2010. Direct effects of post-Yugoslav wars belong to the past, but indirect effects may have had more persistent effects: a lost decade of the ’90s led to weak institutional development and the creation of the local form of state capitalism, which provides weak fundamentals for economic growth. Monetary policy and exchange rate regimes in the region are mostly centred around stable exchange rates and strive for the introduction of the Euro (Bulgaria and Croatia joined the ERM II in 2020). However, the impact of exchange rate regimes on long-run economic growth is neutral. Preference for credibility building monetary regimes is a legacy of the past. Financial predictability served as a shock absorber and a substitute for good institutions in order to attract inflows of international capital, which flooded ex-communist countries after the emerging markets crisis in the late ’90s. However, when the wave of capital inflows stopped in the Great Recession, more fundamental growth factors emerged, explaining the slow convergence of the majority of SEE countries in the second decade of the 21st century.

The Tragedy of Transition: Development, Deterioration, Decay. The Case of Hungary, 1990-2020

The essay is about the economic and political development of Hungary in the last 30 years. It can be neatly divided into three periods which coincide with the calendar decades almost perfectly. After the collapse of the communist system, the first period constituted a glorious decade in development: the first two governments implemented almost all indispensable structural reforms required for a successful transition. After the financial stabilization in 1995, a consistent macroeconomic policy was applied, leading to export and investment-driven, hence sustainable economic growth. The next decade brought deterioration: reforms were stalled, and a sharp turn to consumption-led and debt-fuelled growth resulted in twin deficits which, by the time of the Great Recession, almost triggered a sovereign debt default. After a short period of successful financial stabilization, a populist-nationalist government came to power in 2010. A decade of decay set in: reversal of structural reforms, nationalization, monopolization, protectionism, market-distorting taxation and subsidization, state capture by a corrupt oligarchy, together with inconsistent macroeconomic policy. In addition, the self-styled „illiberal regime” of Viktor OrbĂĄn demolished the rule of law and all institutions representing checks and balances in a democracy. Corruption was elevated to the level of official government policy. With the help of the huge amount of subsidies coming from the EU, the regime maintained financial equilibrium and achieved significant growth during the time of global boom between 2014-2019. However, given the fact that private investments and productivity stay rather low in the non-tradable sector of the domestic economy, real convergence to Western efficiency and living standards remain elusive. Today Hungary constitutes a primary example of an economy pushed into a typical middle-income trap by its oligarchic and authoritarian regime. It also proves that transition reforms are all reversible; institutions are fragile. Restoration of the rule of law and democracy seems to be an indispensable prerequisite for convergence and development.

Does Poland’s Economy Meet the Criteria of Real Convergence with the Euro Area?

EU catching up countries, which operate in a monetary union with highly developed countries, recorded good economic results until the 2008+ crisis. However, their resistance to the economic recession turned out to be much lower than that of the economically stronger countries (except Poland).

Has COVID-19 pandemic crisis changed the EU convergence patterns?

Due to the Covid-19 pandemic, governments across the EU countries had to introduce measures to close the borders, restrict the movement of people, and suspend business activities in nonessential sectors. These restrictions threatened to result in the worst economic shock since the Great Depression of the 1930s. This situation forced the EU leaders to quickly implement urgent measures in the form of stimulating packages in order to avoid a catastrophic economic collapse. The measures, however, have been implemented without coordination and insufficiently considering the solidarity principle among the Member States, which is one of the EU basic principles. In that way, the already existing gap in development among the EU economies has become even more pronounced, which will certainly have an impact on the convergence process in the EU. In that sense, this paper is aimed at analyzing the convergence process among the EU economies during the period from 2004 to 2020 and comparing differences among the EU member states during the pandemic crisis (in 2020) and the global economic crisis (in 2008). To define the policy recommendations for overcoming the crisis and for obtaining a satisfactory level of real convergence and nominal convergence, Hierarchical Agglomerative Clustering (HAC) was performed on the data for 2020 and five clusters were derived.