Income and structural convergence of Western Balkans to European Union.

• Author: Meksi, Ermelinda
• Position: Report

1. Introduction

   For more than 13 years Albania together with other countries of Western Balkans, such as Bosnia and Herzegovina, Macedonia, Montenegro and Serbia (1), have committed to the integration process to EU. The economic criteria that will enable the country to catch up with the standard of EU need to be met alongside a set of political and democratic reforms. The catching up or economic convergence is supported through the establishment of strong institutions and sound macro-economic and fiscal policies support the investment climate. There is already a positive experience of the new EU members that have converged to some extent to the EU standard. There are several empiric studies that have tested the cross-sectional convergence among countries in different regions. Ancona (2007) has included Albania with a set of Mediterranean countries in an attempt to estimate the convergence of income per capita during 2000-2004. The conclusion of that study is that the Balkan countries aspiring EU accession have a growth rate higher than the EU average during 2000-2004.

   The aim of this paper is to draw an analysis of the convergence theory for Albania and Balkan region by assessing the speed of GDP per capita, as a precondition for the convergence of incomes, and calculate if it has contributed to diminishing or not the differences in incomes compared to the EU. Additionally, it will assume the catching up time gap based on the predicted economic growth. The convergence is seen at both, income level and structural level, by showing the sectors' contribution transformation in years due to development.

   The discussion will be based on the classical approach of economic convergence for developing countries. Data used in this paper are subtracted by the World Bank Data, IMF World Economic Outlook. The countries included in the analysis are: Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Malta, Montenegro, Poland, Romania, Slovakia, Slovenia and Serbia. The GDP per capita in PPP is converted in natural logarithm as suggested by the literature for the ease of calculations and derivation of standard deviation.

2. Theoretical Approach

   The convergence concept is at the core of the growth theories. It has evolved from neoclassical growth theory to the new growth theory. The idea of convergence is to test if the income levels of the poorest countries of the world are getting closer to those of richer countries and it has become a question of great importance for the prosperity in the world. There are debates on the convergence, interpretations, implications, and absorptive capacities within the economic development theories. Myrdal (1957) argues that is more likely that economic inequalities between nations are increasing. According to his model, investments are more likely to take place in already advanced economies, and skilled workers are more likely to move from peripheral to core regions than the other way round. Moreover, both Prebisch (1950) and Singer (1950) in their thesis state the divergence among developed and developing countries will deteriorate over time explained by the deterioration of the terms of trade between primary goods and manufactured products in the long run.

   Additionally, economists have been interested to look into both structural and income level convergence. Structural convergence occurs when the convergence of the income per capita of two countries is associated with convergence on sectorial structure. The study of structural convergence can provide a way to examine the process of development in the long run. The existence of convergence suggests that countries follow similar stages of development characterized by the rise and fall of similar types of sectors as income grows and countries may converge to a structural steady state, in which the sectoral mix of outputs becomes more uniform across countries.

   The convergence concept comes as a derivation of the Solow model (1956). The main assumption of the model on diminishing returns of the capital supports the presentation of three important derivations, such as: a) a less developed economy (with a lower GDP per capita) tends to grow faster than a more developed one; b) the growth rate tends to diminish with the development of the economy; c) if the economies share the same important features, the less developed economy will tend to converge its revenue to the developed ones. The convergence model gives insights to the developing countries by implying that if they can fulfil some preconditions in terms of political and economic stability, good governance and business climate, they can accelerate their development process and converge to the developed countries or steady states. The Western Balkans region is supposed to benefit from the convergence model due to their commitment to EU membership and the related obligations to build reliable and democratic institutions. Additionally, there are potentials for attracting foreign investments due to geographic location to EU markets, low labour costs combined with relatively well educated people.

   The basic equation of the Solow model that describes the drive of the economy toward the steady states is given as:

   [[bar.k].sub.t] = sf ([k.sub.t])-(n + x + [delta])[k.sub.t] or [g.sub.k] = s f([k.sub.t])/[k.sub.t]-(n + x + [delta]) (1)

   where: k--capital per unit of effective labour; [bar.k]--increase of capital per effective labour unit; [g.sub.k]--growth rate of capital; n--growth rate of population; x--rate of exogenous technical progress; [delta]--rate of capita depreciation; s--saving rate; f(k)--production function.

   Based on the Solow model, and Cobb Douglass production function, Barro and Sala-i-Martin (1990) have approximated the transitional growth process in the neoclassical model as in the followings:

   [MATHEMATICAL EXPRESSION NOT...