Theorie und Politik der Europäischen Integration
Prof. Dr. Herbert Brücker
Lecture 8
Growth effects and capital market integration
Theory and Politics of Eropean Integration
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
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
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
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.
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
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’
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
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
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.
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
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’.
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).
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.
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
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
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
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
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
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
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
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*
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
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
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
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)
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)
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’
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
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
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
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.