Academic journal article Review of European Studies

Economic Convergence in the European Union: How Does Malta Fit In?

Academic journal article Review of European Studies

Economic Convergence in the European Union: How Does Malta Fit In?

Article excerpt

Abstract

The paper tests the hypothesis that developing member states of the European Union converge to richer countries. On the basis of a Cobb-Douglas production function this study estimates beta convergence, and sigma convergence, utilising data from the 28 EU member countries. The results confirm the hypothesis and indicate that poor countries grow faster than rich economies in terms of per capita income and the convergence process for Malta is slower. This finding has important implications for transition EU member states, including that Malta needs to overcome several constraints in the transitional phase to increase the steady state level.

Keywords: absolute convergence, conditional convergence, divergence, β convergence, σ convergence, spatial dimension

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Economic convergence has always been associated with one of the major benefits of EU membership given that economic and social cohesion is one of the objectives specified in the EU Treaty. Empirical literature shows that less developed countries tend to grow more rapidly than wealthier countries. Such that, in time, all economies converge in terms of per capita GDP (Note 1). Nonetheless, it has also been acknowledged that despite trends of convergence, substantial income levels differentials still persist today across European countries (Note 2).

There is extensive empirical growth literature that examines the convergence hypothesis over an extended period. Following the seminal work of Baumol (1986), which found that convergence amongst industrialised countries was almost perfect, the DeLong (1988) critique, and the extensions by Barro and Sala-i-Martin (1991, 1992) and Mankiw et al. (1992), the convergence issue attracted considerable attention thereafter in empirical literature.

Convergence is well documented for EU15, and membership in the customs union proved to be an important factor, though this is not an automatic outcome. Consequently, ever since the enlargement of the EU in 2004, many researchers covered the new member states (NMS), prominently the Central Eastern European (CEE) countries, in the convergence debate (Kaitila, 2004; Varblane & Vahter, 2005; Prochniak, 2008; Vojinovic & Oplotnik, 2008; Vojinovic et al., 2010). The literature generally reports that the catching-up process is sensitive to both the study period and the chosen cluster of countries.

Malta is the smallest EU member state, with a population of less than half a million, which acceded to the EU on May 2004 and adopted the euro in January 2008. One of the characteristics of small states relates to the limited ability to reap the benefits of scale economies (Briguglio & Vella, 2015), and indeed, the major arguments in favour of Malta's accession to the EU related to opportunities in having a larger market and free import barriers against Maltese products. In addition, it was argued that Malta could also attract foreign direct investment from non-members wanting to use Malta as a means of penetrating European markets (Briguglio, 2011). Consequently, from an economic point of view, improvements in per capita income and lower income disparities with member states of the EU were essential objectives of Malta's integration in the EU.

The paper is intended to serve two goals. First, this paper focuses on NMS (Note 3) of the European Union, and tests the hypothesis that the less developed member states experience economic convergence. In order to do this, the paper compares GDP per capita growth rates in purchasing power standard (PPS) (Note 4) for those of the remaining EU28 countries utilising annual data averaged for the period ranging from 2000 to 2012. Second, this paper studies how Malta fits in the convergence process after a decade of EU membership on which little literature has been published.

Based on the evidence from EU member states, Section 2 reviews the catching-up process and discusses the empirical evidence of the potential determinants of convergence. …

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