The power and limits of integration:Growth Effects of EU Membership

Fabrizio Coricelli 1

1Paris School of Economics and CEPR

Paris, OECD May 20, 2014

Outline

Motivation

Measuring the economic benefits of EU membership

Synthetic counterfactual method

Contribution of our paper

Main results

Economic integration and liberalization not enough

MotivationI As economic integration deepened political integration

lagged behingI Alesina et al (AER 2000) argued that deeper economic

integration may induce political disintegration (see alsoBrou and Ruta (JEEA 2011))

I Enjoying the benefits of economic integration, countrieshave little incentives to move on political integration, whichrequires both income redistribution and abandoningnational sovereignity

I The Great Recession and the euro-debt crisis made evenmore dramatic the tension between economic and politicalintegration, putting under stress the sustainability of theEuropean project

I Economic benefits of the EU and the euro are increasinglyquestioned

Motivation 2

I EU integration unique experience: Four majorenlargements (from 1970s to 2000s) taking place at

I Sharply different outside context in terms of "globalization",trade integration at the world level (1970s vs 1990s and2000s)

I This may help understanding benefits from integrationunder different global conditions

I Very different levels of incomes per capita of new entrantsrelative to incumbents

I Radically different context of financial integration(liberalization of capital account)

Measuring the economic benefits of EU membership

I In such a context, measuring the benefits of EU entry iscrucial

I Are the countries that joined the European Integrationproject better-off?

I How much do countries actually benefit from membershipin the European Union (EU)?

I EU membership estimates: few and widespreadI Range of estimates (Eichengreen to Badinger): w/o

integration, per capita incomes would be 2-20 per centlower, though estimates often “not completely robust”

Hard to measure the benefits: Need a goodcounterfactual

I Our research question:

I What would have been the levels of per capita income (andproductivity) if a given country had not become afull-fledged member of the EU?

I Answer based on Synthetic control methods for causalinference in comparative case studies or “syntheticcounterfactuals” (SCM), Abadie et al: AER 2003, JASA2009, AJPS 2014

I SCM estimates the effect of a given intervention bycomparing the evolution of an aggregate outcome variablefor a country “treated” to its evolution for a synthetic controlgroup

Synthetic counterfactual method

I SCM minimizes the pre-treatment distance (mean squarederror of pre-treatment outcomes) between the vector oftreated country’s characteristics and the vector of potentialsynthetic control characteristics

I Specify: (1) treatment, (2) set of matching covariates, and(3) “donor pool”

I Advantages:I It allows the study of the dynamic effects, not just average

pre and post treatmentI It is designed for case-study, so we can analyze individual

country experiences

Contribution of our paper

I Campos, Coricelli and Moretti (2014)

I We apply Synthetic counterfactuals method to estimategrowth and productivity payoffs of EU membership

I Our "treatment" entry in the EU

I Analyze all enlargements: 1973, 1980s, 1995, 2004

Specification

I Year treatment starts (EU membership): 1973: IRL, DK,UK; 1980s: Greece, SP, Port; 1995: Austria, Fin, Sweden;2004: Poland CZ etc

I Matching over which covariates? Follow Abadie et al 2003:investment, labour, agriculture in GDP, level of secondaryand tertiary education, initial GDP pc

I Donor pool: Used various pools ranging from whole worldto neighbours, report upper middle income sample (fromBover and Turrini, 2010)

Example of bad outcome

Greece: EU entry

The magnitude of the effects: Actual-counterfactual

Summary of the main findings

I Positive effects from EU membership on growth andproductivity, heterogeneity across countries

I Large effects for 1973 and 2004, modest for 1995 andmixed for 1980s

I Mixed 1980s: negative for Greece

I Magnitude of average effect: 12 percent

Preliminay explanations

I Given so similar “income gaps at entry,” why are 1973 and1995 payoffs so different? Role of institutions andinstitutional development

I Why are EU membership benefits for Greece relativelylow? Structural reforms avoidance

I What helps to explain post accession payoffs? Tradeintegration and financial liberalization, but also structuralreforms and institutional development

Economic integration and liberalization not enough

I Institutional developments and structural reforms seemcrucial to exploit growth benefits of membership

I Trade integration powerful but not sufficient

I Financial sector development and financial integration veryrelevant and they are more "institution intensive" than tradeliberalization (rule of law, contract enforcement)

I The recent crisis may have negative effects in this regard

Expalining the gap: A regression analysis

European Integration TodayI Now to understand European Integration focus has to shift

from trade, agriculture and EU norms to:

I There are potentially large positive effect from EUmembership, well beyond trade integration: Need to betterunderstand them (case studies of Italy and possibly Italytoday would be very instructive)

I Political economy: political disintegration and North-Southdivide

I Need to emphasize more coordinated, common policies,including macro policies with immediate effects in this crisisperiod

I Economic growth: again, North can prosper while the Southstruggles (the Italian Mezzogirono a possibly relevantparallel)

I Financial development: True banking union may play a keyrole

References

I Alesina, Spolaore and Wacziarg (American EconomicReview, 2000), “Economic Integration and PoliticalDisintegration”

I Brou and Ruta (Journal of European EconomicAssociation 2011), “Economic Integration, PoliticalIntegration, or Both?”

I Campos, Coricelli and Moretti (CEPR Discussion Paper2014), "Economic Growth and Political Integration:Estimating the Benefits from Membership in the EuropeanUnion Using the Synthetic Counterfactuals Methods"