theorie und politik der europäischen integration prof. dr. herbert brücker lecture 8 growth...
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![Page 1: Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 8 Growth effects and capital market integration Theory and Politics](https://reader034.vdocument.in/reader034/viewer/2022051615/55204d8749795902118da1ac/html5/thumbnails/1.jpg)
Theorie und Politik der Europäischen Integration
Prof. Dr. Herbert Brücker
Lecture 8
Growth effects and capital market integration
Theory and Politics of Eropean Integration
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Last Lecture
• EU trade and … · Facts
– Intra-EU trade– Extra-EU trade– Commodity composition of exports and imports– MFN tariff levels
· Contingent Protection· EU External Trade Preferences
– GSP– EU-Mediterranean Trade Area– CIS and Balkans– Former colonies– Non-regional PTA’s
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Last Lecture
• … competition policies· EU competencies· Forms of anti-competitive behaviour
– collusion – cartels (e.g. vitamin cartel)– territorial price discrimination (e.g. Nintendo, pharmaceuticals)– abuse of dominant market position (e.g. Microsoft)
· Leftovers– merger control– state aid policy
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Merger control
• Initially P=AC.• Merger implies lower AC to
AC’, but raises the price to P’.
CS=-a-b; ‘ripoff’ PS=+a+c• Net welfare = -b+c ;
ambiguous, ‘efficiency defence’
• Laissez-faire (in US and increasingly in EU); if free entry then eventually P driven down to AC’.• As in BE-COMP diagram.
euros
QuantityC’ C
P’
P=AC
ab
c
Demand curve
AC’
Williamson diagram
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
State aid economics
• Look at two cases:
• Restructuring prevention.
• Unfair competition.
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Restructuring prevention
• Consider subsidies that prevent restructuring
• Specifically, each governments make annual payments to all firms exactly equal to their losses• i.e. all 2n’ firms in Figure
6-9 analysis break even, but not new firms
• Economy stays at point A• This changes who pays for
the inefficiently small firms from consumers to taxpayers.
Number of firms
Mark-up
COMP
BEFT
BE
2n’ n” n’
E’
A
1
E”'
A
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Restructuring prevention: size of benefit
• Pre-integration: fixed costs = operating profit = area “a+b”• Post-integration: operating profit = b+c• ERGO: Breakeven subsidy = a-c • Net Benefit: b+c+a-c=a+b
Sales per firm
AC
Price
Totalsales
Demand curve
Number of firms
Mark-upeuros
x’
COMPBEFT
2n’
p’
C’ CA
pA
xA= 2CA/2n’
pA
a
b c
E’
AA
A
MC
E’
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Restructuring prevention: welfare impact
Sales per firm
AC
Price
Totalsales
Demand curve
Number of firms
Mark-upeuros
x’
COMPBEFT
2n’
p’
C’ CA
pA
xA= 2CA/2n’
pA
a
b c
E’
AA
A
MC
E’
d
• Change producer surplus = zero (profit is zero pre & post)• Change consumer surplus = a+d• Subsidy cost = a-c• Total impact = d+c
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Only some subsidise: unfair competition
• If Foreign pays ‘break even’ subsidies to its firms
• All restructuring forced on Home
• 2n’ moves to n”, but all the exit is by Home firms
• Unfair
• Undermines political support for liberalisation
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
EU policies on ‘State Aids’
• 1957 Treaty of Rome bans state aid that provides firms with an unfair advantage and thus distorts competition.
• EU founders considered this so important that they empowered the Commission with enforcement.
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
This lecture
• Growth effects …• Some facts on EU post-WWII growth• The neoclassical growth model (Solow-model)• Integration in the neoclassical growth model
• … and capital market integration• microeconomics of capital market integration
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Growth effects
• European leaders have long emphasised a different the pro-growth aspects of European integration
• These operate in a way that is fundamentally different from the way allocation effects operate;
• they operate by changing the rate at which new factors of
production – mainly capital – are accumulated,
• hence the name ‘accumulation effects’.
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Verbal logic of growth
• Growth in income per worker requires more output per worker
• Nation's labour force can produce more goods and services year after year only if they have more/better 'tools' year after year.• 'tools' means capital broadly defined:
· physical capital (machines, etc.), · human capital (skills, training, experience, etc.), · knowledge capital (technology).
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Verbal logic of growth
• ERGO, rate of output growth linked to rate of physical, human and knowledge capital accumulation.
• Most capital accumulation is intentional and it is called investment.
• Thus: European integration affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital.
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Verbal logic of growth: summary
• European integration (or any other policy) → allocation effect → improved efficiency → better investment climate → more investment in machines, skills and/or technology → higher output per person.
• In neoclassical growth model medium run effects eventually peter out• Growth rate returns to its long-run rate
• In endogenous growth models long run effects raise long-run rate of technological progress, and, hence, the growth rate of output, capital stock and consumption forever
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Facts: European Growth Phases, 1890-1992
Period Real GDP Real GDP per capita
Real GDP per hour
1890-1913 2.6 1.7 1.6
1913-1950 1.4 1.0 1.9
1950-1973 4.6 3.8 4.7
1973-1992 2.0 1.7 2.7
Whole Period
1890-1992 2.5 1.9 2.6
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Facts: Growth in the WWII Reconstruction Phase.
The Set-Back: (Pre-war year when GDP equalled that of 1945)
Back-on-Track Year (Year GDP attained highest pre-war level)
Reconstruction Growth (rate 1945 to col. 2 year)
Austria 1886 1951 15.2%
Belgium 1924 1948 6.0%
Denmark 1936 1946 13.5%
Finland 1938 1945 n.a.
France 1891 1949 19.0%
Germany 1908 1951 13.5%
Italy 1909 1950 11.2%
Netherlands 1912 1947 39.8%
Norway 1937 1946 9.7%
Sweden These nations grew during WWII
Switzerland
UK
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Facts: GDP per capita & Rankings, 1950 and 1973 (1990 international dollars).
1950 GDP (1990 $)
European Rank 1950
Change in Rank 1950-1973
GDP Growth Rate
EEC average
4,825 8.0 + 1.2 4.2
EFTA average
6,835 3.6 -1.4 3.0
France 5,221 7 + 2 4.0
Germany 4,281 9 + 5 5.0
Italy 3,425 13 + 2 4.9
UK 6,847 2 -5 2.4
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
1950 GDP (1990 $) European Rank 1950 Change in Rank 1950-1973
GDP Growth Rate
EEC average 4,825 8.0 + 1.2 4.2
Netherlands 5,850 5 -1 3.4
Belgium 5,346 6 -2 3.5
France 5,221 7 + 2 4.0
Germany 4,281 9 + 5 5.0
Italy 3,425 13 + 2 4.9
EFTA average 6,835 3.6 -1.4 3.0
Switzerland 8,939 1 0 3.1
UK 6,847 2 -5 2.4
Sweden 6,738 3 + 1 3.1
Denmark 6,683 4 + 1 3.1
Norway 4,969 8 -4 3.2
Finland 4,131 10 0 4.2
Austria 3,731 11 + 2 4.9
Others average 2,401 14.3 -0.3 5.2
Ireland 3,518 12 -3 3.1
Spain 2,397 14 + 1 5.8
Portugal 2,132 15 + 1 5.6
Greece 1,558 16 0 6.2
For Comparison USA 9,573 2.4
Japan 1,873 8.0
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
• Shows medium run growth effects in simple diagram
• To simplify, start with whole EU as a single, closed economy with fully integrated capital and labour markets and the same technology everywhere.
Neoclassical growth: The Solow diagram
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
The Solow diagram
A
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)Y/L*
K/L*K/Lo
Io
Do
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Induced capital formation
CE
D
B
K/L
euros/L
GDP/L
s(GDP/L)
K/L)
GDP/L’
A
s(GDP/L)’
Y/LcY/L’
Induced capital formation effect, i.e. medium-run growth bonus
Allocation effectY/L*
K/L*
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
C
D
B
K/L
GDP/L
s(GDP/L)
K/L)
K/L’
A
s’(GDP/L)
Y/L’
Medium-run growth bonus
Y/L*
K/L*
Integration induced investment rate rise
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
K/L =Knowledge/L
euros/LGDP/L
s(GDP/L)
K/L)
Y/L*
K/L*
B
A
Long-term endogenous growth
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Long-term growth impact of integration
K/L =Knowledge/L
euros/L
GDP/L
s(GDP/L)
K/L)
Y/L*
K/L*
B
A
s’(GDP/L)
C
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Long-term growth impact of integration
K/L =Knowledge/L
euros/L
GDP/L
s(GDP/L)
K/L)
Y/L*
K/L*
B
A
s’(GDP/L)
C
Integration improves efficiency → improves investment climate → higher investment rate (s rises to s’) → faster growth (knowledge capital accumulates more rapidly)
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Empirical evidence: Are growth and integration related?
• Prima facie evidence• EEC countries grew at 4.2% p.a. 1950-73• EFTA countries grew at 3.4% p.a. 1950-73• Poor countries grew at 4.2% p.a. 1950-73
• Econometric evidence• Medium term growth bonus, but no long-run effects (Badinger
2005a, 2005b, Coe/Moghadem 1993; Italianer 1994, Henrekson 1997)
• EU Eastern enlargement: CGE simulation evidence• GDP level effect of 0.2-0.3% for EU-15• GDP level effect of 2-4% for NMS-10• Germany: GDP level effect of 0.4-0.6% (Keuschnigg/Kohler 2002)
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Microeconomics of capital market integration
MPK
Ko
ro
Ko+ K*oK*o
r*oMPK*
euros euros
A
K’Capital flow
r’r’
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Microeconomics of capital market integration
• ‘Native’ capital-owners in Home lose area ‘A’;
• Home labour gains area A+ B;
• Total economic impact on Home citizens equal to area B
MPK
Ko
ro
Ko+ K*oK*o
r*oMPK*
euros euros
K’Capital flow
r’r’A B
C D
E
F
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Microeconomics of capital market integration
• Foreign capital still employed in Foreign gains F;
• Foreign labour loses D+F; • total impact on Foreign-based
factors is -D.
MPK
Ko
ro
Ko+ K*oK*o
r*oMPK*
euros euros
K’Capital flow
r’r’A B
C D
E
F
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Microeconomics of capital market integration
• if we count the welfare of Foreign capital owners whose capital now works in Home (gains C+D), so overall Foreign welfare gain is C.
MPK
Ko
ro
Ko+ K*oK*o
r*oMPK*
euros euros
K’Capital flow
r’r’A B
C D
E
F
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Theory and Politics of European Integration Growth effects and capital market integration
Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
NEXT LECTURE
• The Integration of European Labour Markets• Reading: Baldwin/Wyplosz (2006), 2006, Ch. 7• Boeri, T./H. Brücker (2005), Why Are Europeans So
Tough on Migrants?, Economic Policy, 44, 631-703.• December 11.